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A$ Correlations Sharply Lower With Yield Differentials, Rising For Iron Ore


AUD/USD correlations with yield differentials are back into negative territory for the past week, see the table below. Correlations are much firmer with commodity prices, particularly iron ore.

  • The dip in correlations with yield differentials contrasts with the late August/early September experience when correlations were generally much more positive.
  • The trend in yield differentials has generally been against the AUD. For instance, the AU-US 2yr spread is now back around -64bps, which is back to lows from mid-July. The 5yr spread is also back below 0bps (last -21bps).
  • There are some important AU data releases this week (see this link for more details), but the yield differential outlook could be swamped by the US CPI print tomorrow night.
  • The AUD rebound from the low 0.6700 region is more in line with the pickup in commodity prices, particularly iron ore.
  • The iron ore rebound fits with better seasonal demand from China and efforts to boost the infrastructure outlook, although a cloud still hangs over the broader backdrop.
  • Copper prices has also rebounded, although the correlation with aggregate base metals is lower.
  • Correlations with global equities remain positive as well. AUD/USD can still play catch up with the better equities trend, although some of the gap has closed in recent sessions.

Table 1: AUD/USD Correlations (Levels)

2yr yield differential-0.630.31
5yr yield differential-0.480.65
10yr yield differential-0.430.57
Global commodity prices0.680.65
Base metals0.190.86
Iron ore0.870.77
Global equities 0.680.85
US VIX index-0.57-0.72

Source: MNI - Market News/Bloomberg

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