Menu

Search

  |   Commentary

Menu

  |   Commentary

Search

Fundamental Evaluation Series: AUD/USD vs. 2-year yield spread

The chart above shows, how the relationship between AUD/USD and 2-year yield divergence has unfolded since 2012.

  • It can be seen even with a naked eye, that the pair and the yield spread between 2-year treasury and 2-year Australian government bond have enjoyed a very close relationship.
  • While the Reserve Bank of Australia (RBA) reduced rates after the financial crisis of 2008/09, it soon started increasing interest rates due to higher commodity prices and higher inflows from other western economies. However, as commodity prices started declining in 2011, RBA started reducing rates since the end of 2011.
  • RBA reduced cash rates from 4.75 percent in 2011 to 2 percent by the summer of 2015. And the yield spread between the two countries declined from 2.53 percent 1.2 percent. During the same period, the Australian dollar declined from 1.056 against the USD to 0.728 against the dollar.
  • The exchange rate bottomed in August around 0.69
  • However, there has been divergence since then. Between now and the summer of 2015, the RBA reduced rates further by 50 basis points, while Fed raised rates by 100 basis points. The yield spread also declined from 120 basis points to just 46 basis points. However, the AUD/USD didn’t make further low, instead, it has moved higher from 0.728 in July 2015 to 0.795 as of today.
  • We believe, that expectations of a rebound in commodities as well as Chinese economy are playing parts here. However, sooner or letter the due would have to converge, which we expect would come in terms of rate hikes from RBA and increase in the spread in favor of the Australian dollar.

As expected, since our last review in July, the yield spread has started widening in favor of the Australian dollar. The spread is currently at 49 basis points, and the exchange rate is at 0.795. A further correction in Australian dollar likely or the widening of spread.

FxWirePro launches Absolute Return Managed Program. For more details, visit http://www.fxwirepro.com/invest

  • ET PRO
  • Market Data

Market-moving news and views, 24 hours a day >

November 16 21:00 UTC Released

UST Flows,Incl.Swaps

Actual

16.7 Bln USD

Forecast

Previous

111.5 Bln USD

November 16 21:00 UTC Released

USOverall Net Capital Flows

Actual

-29.1 Bln USD

Forecast

Previous

108.2 Bln USD

January 31 00:00 UTC 418862418862m

ARAnnual Primary Balance*

Actual

Forecast

2016 bln ARS

Previous

Bln AR bln ARS

January 31 00:00 UTC 418862418862m

ARAnnual Primary Balance*

Actual

Forecast

2016 bln ARS

Previous

Bln AR bln ARS

January 22 19:00 UTC 430682430682m

ARTrade Balance

Actual

Forecast

Previous

-1541 %

January 31 00:00 UTC 418862418862m

ARAnnual Primary Balance*

Actual

Forecast

2016 bln ARS

Previous

Bln AR bln ARS

January 22 19:00 UTC 430682430682m

ARTrade Balance

Actual

Forecast

Previous

-1541 %

January 31 00:00 UTC 418862418862m

ARAnnual Primary Balance*

Actual

Forecast

2016 bln ARS

Previous

Bln AR bln ARS

January 31 00:00 UTC 418862418862m

ARAnnual Primary Balance*

Actual

Forecast

2016 bln ARS

Previous

Bln AR bln ARS

January 31 00:00 UTC 418862418862m

ARAnnual Primary Balance*

Actual

Forecast

2016 bln ARS

Previous

Bln AR bln ARS

Close

Welcome to EconoTimes

Sign up for daily updates for the most important
stories unfolding in the global economy.