Yield Differentials Dominating Short Term Correlations

AUD/USD correlations are below historical norms at present. The table below presents the levels correlations between AUD/USD and various macro drivers (note the correlation with yield differentials is based off government bond yields).

• Short term correlations, for the past week, sit more elevated for yield differentials, particularly at the 2yr point. This likely owes to the recent rebound in US yields, which has knocked the A$ off its recent highs. Longer term correlations (for the past month) look close to average.
• Whilst the US is likely to remain a key driver of the yield differential, note that next week's Q1 CPI print in Australia will be an important update for the RBA outlook (data prints on Wednesday).
• Correlations with global commodities are lower, likewise for base metals and iron ore. Correlations are higher for the past month, but below longer term averages. It's a similar story for global equities and the VIX index. Over the medium term though we would expect these correlations to rebound.

Table 1: AUD/USD Correlations

Source: MNI - Market News/Bloomberg