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AU-US Curve Correlation Higher Than History Suggests It Should Be

AUSSIE BONDS
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Over the past couple of months, there have been two episodes of a noticeable reduction in the cross-market curve correlation between Australia and the US. Those episodes suggested a focus on domestic drivers rather than US and global factors.

  • In both instances, the dips in correlation can be attributed to higher-than-expected CPI prints in Australia. The first occurred in late April, coinciding with the release of Q1 CPI, while the second was linked to the May CPI Monthly release.
  • Similar to the late April episode, the most recent dip was short-lived, with the cross-market correlation between the cash AU 3/10 and the US Treasury 2/10 curves quickly returning to the upper end of its range for the year.
  • However, considering that global curve correlations tend to weaken as global policy tightening matures and policy rates diverge into their respective easing cycles, the current level may also prove to be fleeting.


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Over the past couple of months, there have been two episodes of a noticeable reduction in the cross-market curve correlation between Australia and the US. Those episodes suggested a focus on domestic drivers rather than US and global factors.

  • In both instances, the dips in correlation can be attributed to higher-than-expected CPI prints in Australia. The first occurred in late April, coinciding with the release of Q1 CPI, while the second was linked to the May CPI Monthly release.
  • Similar to the late April episode, the most recent dip was short-lived, with the cross-market correlation between the cash AU 3/10 and the US Treasury 2/10 curves quickly returning to the upper end of its range for the year.
  • However, considering that global curve correlations tend to weaken as global policy tightening matures and policy rates diverge into their respective easing cycles, the current level may also prove to be fleeting.


Keep reading...Show less