{"id":9864,"date":"2022-10-14T05:53:08","date_gmt":"2022-10-14T05:53:08","guid":{"rendered":"https:\/\/mdr.foobrdigital.com\/?p=9864"},"modified":"2022-10-14T05:53:08","modified_gmt":"2022-10-14T05:53:08","slug":"how-bond-spreads-between-two-countries-affect-their-exchange-rate","status":"publish","type":"post","link":"https:\/\/mudassirbackup.infinitycodestudio.com\/index.php\/2022\/10\/14\/how-bond-spreads-between-two-countries-affect-their-exchange-rate\/","title":{"rendered":"How Bond Spreads Between Two Countries Affect Their Exchange Rate"},"content":{"rendered":"\n

The bond spread<\/strong> represents the difference between two countries\u2019 bond yields.<\/p>\n\n\n\n

These differences give rise to\u00a0carry trade, which we discussed in a previous lesson.<\/p>\n\n\n\n

\"How<\/figure>\n\n\n\n

By monitoring bond spreads and expectations for interest rate changes, you will have an idea of where currency pairs are headed.<\/p>\n\n\n\n

Here\u2019s what we mean:<\/p>\n\n\n\n

\"Positive<\/a><\/figure>\n\n\n\n

As the bond spread between two economies widens<\/em>, the currency of the country with the higher bond yield appreciates<\/em> against the other currency of the country with the lower bond yield.<\/strong><\/p>\n\n\n\n

You can observe this phenomenon by looking at the graph of AUD\/USD price action and the bond spread between Australian and U.S. 10-year government bonds from January 2000 to January 2012.<\/p>\n\n\n\n

Notice that when the bond spread rose from 0.50% to 1.00% from 2002 to 2004, AUD\/USD rose almost 50%, rising from .5000 to 0.7000.<\/p>\n\n\n\n

The same happened in 2007, when the bond differential rose from 1.00% to 2.50%, AUD\/USD rose from .7000 to just above .9000.<\/p>\n\n\n\n

That\u2019s 2,000 pips!<\/p>\n\n\n\n

Once the recession of 2008 came along and all the major central banks started to cut their interest rates, AUD\/USD plunged from the .9000 handle back down to 0.7000.<\/p>\n\n\n\n

So what happened here?<\/p>\n\n\n\n

One factor that is probably in play here is that traders are taking advantage of carry trades.<\/p>\n\n\n\n

When bond spreads were increasing<\/em> between the Aussie bonds and U.S. Treasuries, traders load up on their long AUD\/USD positions.<\/strong><\/p>\n\n\n\n

Why?<\/p>\n\n\n\n

To take advantage of carry trade!<\/p>\n\n\n\n

However, once the\u00a0Reserve Bank of Australia\u00a0started cutting rates and bond spreads began to tighten, traders reacted by unwinding their long AUD\/USD positions, as they were no longer as profitable.<\/p>\n\n\n\n

Here\u2019s one more example:<\/p>\n\n\n\n

\"GBP\/USD<\/a><\/figure>\n\n\n\n

As the bond spread between the UK bond and the US bond decreased<\/em>, the GBP\/USD weakened<\/em> as well.<\/p>\n","protected":false},"excerpt":{"rendered":"

The bond spread represents the difference between two countries\u2019 bond yields. These differences give rise to\u00a0carry trade, which we discussed in a previous lesson. By monitoring bond spreads and expectations for interest rate changes, you will have an idea of where currency pairs are headed. Here\u2019s what we mean: As the bond spread between two economies widens, the currency […]<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[809],"tags":[],"_links":{"self":[{"href":"https:\/\/mudassirbackup.infinitycodestudio.com\/index.php\/wp-json\/wp\/v2\/posts\/9864"}],"collection":[{"href":"https:\/\/mudassirbackup.infinitycodestudio.com\/index.php\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/mudassirbackup.infinitycodestudio.com\/index.php\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/mudassirbackup.infinitycodestudio.com\/index.php\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/mudassirbackup.infinitycodestudio.com\/index.php\/wp-json\/wp\/v2\/comments?post=9864"}],"version-history":[{"count":0,"href":"https:\/\/mudassirbackup.infinitycodestudio.com\/index.php\/wp-json\/wp\/v2\/posts\/9864\/revisions"}],"wp:attachment":[{"href":"https:\/\/mudassirbackup.infinitycodestudio.com\/index.php\/wp-json\/wp\/v2\/media?parent=9864"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/mudassirbackup.infinitycodestudio.com\/index.php\/wp-json\/wp\/v2\/categories?post=9864"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/mudassirbackup.infinitycodestudio.com\/index.php\/wp-json\/wp\/v2\/tags?post=9864"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}