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A$ Correlations Elevated With Short Term Spreads, Metal Prices

AUD

AUD/USD correlations remain elevated with yield spreads, although more so with short tenor spreads, rather than the back end. The table below presents the levels correlations with AUD/USD and key macro drivers over the past week and month. Note the interest rate spread correlations refer to government bond yield differentials.

  • The past month has seen government bond yield spreads tighten back in AUD's favor. The 10yr spread is back in positive territory, whilst the 2-yr is back to around -60bps, we were beyond -80bps this time last month.
  • Spreads have widened slightly this past week post the RBA's somewhat dovish minutes. As we head into early July and the next RBA decision, correlations with yield spreads and the A$ should remain firm. We are comfortably away from +25bps priced in for the July meeting at this stage.
  • Correlations with commodities remain firm, although more so for metals than aggregate indices. There has been focus on iron ore, given recent stimulus talk in China, although the metal is off recent highs, helping cap the AUD rebound.
  • AUD's correlation with global risk appetite, proxied via global equities, remains strong, although much less so with the VIX.

Table 1: AUD/USD Correlations

1wk1mth
AU-US 2yr Spread0.610.90
AU-US 5yr Spread0.360.92
AU-US 10yr Spread-0.340.90
Global Commodities0.360.64
Global Base Metals0.820.92
Iron ore0.670.95
Global equities 0.910.96
US VIX index0.52-0.80

Source: MNI - Market News/Bloomberg

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