###POV: DIVERGENT ECONOMIC FORTUNES PUT...>

AUSTRALIA: ###POV: DIVERGENT ECONOMIC FORTUNES PUT PRESSURE ON AU/US SPREAD,

COULD SEE FURTHER AUD DOWNSIDE. The AU/US 10-Year spread wider today in Asia,

last at 3.6bp after dropping to lows of -2bp on Friday post-NFP. Aussie cash

bonds were closed during this period so the jump higher was expected at the

open, but focus will be on the RBA rate annoucement on Tuesday and the RBA's

quarterly forecast update and policy statement on Friday. RBA Governor Lowe will

deliver a speech on Thursday, offering plenty of chances for the market to

adjust hike expectations which dropped after a spate of weak data last week.

Diverging fortunes in Wage Growth in particular highlight how inflationary

pressures could evolve going forward and keep the RBA on the sidelines.

- The spread last dipped this low in 2000 when the RBA-Fed cash rate

differential hit -50bps. Typically if negative the spread does not stay that low

for long due to a market demand for a spread to cover liquidity and FX risk.

Should the spread remain at these tight levels though (note it started 2018 at

around 22bp) then AUD/USD could have further to fall, particularly as traders

pile back into the USD longs after pushing the dollar index to 3.5 year lows.