- US bond yields are now higher than Australia, a scenario that has often acted to weaken the AUD/USD in the past.
- While the AUD/USD has fallen a bit this year, higher commodity prices have helped to cushion its fall.
- Westpac expects the AUD/USD to remain supported in the near-term should commodity prices remain firm and stock market volatility contained.
The US Federal Reserve has been lifting interest rates for several years, with that trend expected to continue for some time yet. At the same time, the Reserve Bank of Australia (RBA) has kept its cash rate steady at 1.5% since August 2016, a level it’s likely to remain at for some time yet given recent economic data and current market pricing.
The divergence in monetary policy settings has seen Australia’s yield advantage over the United States turn from positive to negative, meaning bond yields in the US are now higher than Australia, a scenario that has often weighed on the AUD/USD in the past.
However, while the AUD/USD has fallen a bit this year, at 3.7%, the decline is still comparatively small given the widening in interest rate differentials.
And the AUD/USD has actually risen a bit this week, even with US 10-year yields lifting to a seven-year high.
This part from Westpac helps explain why.
Commodities, which Australia has an abundance of, have been flying, helped by previous weakness in the US dollar, stronger global growth and supply constraints, both planned and not.
That’s helped to boost Australian export values, and Australia’s terms of trade, helping to partially mitigate the effect of interest rate differentials.
“If commodities remain supported and equity volatility stays low, AUD/USD should trade mostly 0.7450-0.7600 and firm on most cross rates,” says Sean Callow, Senior Currency Strategist at Westpac Bank, referring to the Aussie’s near-term outlook.