The RORO regime was always based on the premise that good economic data in the US is bad for USD because the Federal Reserve would be on hold forever and US yields were so low that yield-hungry investors got squeezed out of US Markets and into foreign currencies. If the traditional relationship between US yields and economic data is restored, RORO will come to an end and stronger US data will be USD supportive. So far this year the USD and equity markets have had a negative relationship.
In recent sessions, many of the usual RORO suspects like small-cap Russell, crude and high yield spreads continue to be heavily offered. But Treasuries at the front end are getting bid, EURUSD and emerging market currencies (ex-TRY) are somewhat rangebound which suggests price action isn’t really “risk-off” at the moment. What we would caveat though is that there are big swings across some asset classes given illiquid markets.
AUDJPY cross looks interesting from a RORO standpoint though, maintaining a foothold just off almost 4-year highs while AUDUSD remains under pressure. The demise of the carry trade has long been pondered but to reemphasise, the best chart for perhaps illustrating the rise of RORO is AUDJPY. The implication is that local economic data has less of an impact on currencies. But the new normal era of QE policies created an unclear and complex environment for Markets. The perception in the Market is that QE would be unambiguously negative and inflationary. It is now seen as being more debatable and uncertain.
