A big yield move, a small currency one

The US two-year Treasury yield fell 16 basis points on 22 October, from 4.81% to 4.65%. By the next afternoon in Sydney, the Australian dollar had barely moved.

The link between yields and the currency is there, but it’s loose. The gap between Australian and US two-year yields was 34.3 basis points on 1 September, when AUD/USD fixed at 0.7170. By 20 October the gap was 6.5 basis points and the fix was 0.6984. From 2 to 20 October the gap narrowed by only 1.4 basis points, from 7.9 to 6.5, while the currency rose. On 21 October it widened to 10.7 basis points.

One yield on its own doesn’t explain a currency, and we aren’t drawing a conclusion from a single day.