FxWirePro: UST yields plunge, DXY dips and momentary gains for Aussie dollar - Relative value trades for AUD crosses

The US dollar and US interest rates probed lower.

US 10yr treasury yields fell from 2.42% to 2.37% - a three-week low - while 2yr yields fell from 1.26% to 1.24%. Fed fund futures yields were slightly lower, Pricing around a 60% chance of the next hike occurring in June.

Consequently, the US dollar index is 0.2% lower, AUD initially probed lower to 0.7639 before rebounding to 0.7680. Iron ore shed another 3% yesterday. 

At risk of testing 0.7800 during the next few weeks as USD longs are pared. Longer term we expect to see it slightly lower to around 0.7600.

A steady hand from the Fed in June plus an optimistic RBA should limit downside on AUDUSD during the next few months.

Further out, though, the underlying AUD trend should be gently lower, as growing bulk commodity supply gradually cools the 2016 price surge.

Iron ore should be back under $80/tonne by June, with further (modest) declines likely in H2 2017.

Option trades of AUD crosses:

Sell AUDUSD 3M 25D RR, and buy 1M AUDUSD vs AUDNZD vol spread, equal vega.

Buy 3M AUDUSD ATM vs sell 1Y AUDJPY 25D Put, 1.5:1 AUD vega.

Long a 4m NZDUSD 0.62 put with a 0.65 KO in AUDUSD.

Long 2m AUDUSD 0.71-0.6860 put spread; sell 2m AUDUSD 0.76 call.