One of the primary drivers that holds the Australian dollar aloft when it should by rights be falling is the $US carry trade. As MB’s five drivers model of currency valuation shows, there is much more to it than that: sentiment, technicals, the $US itself, and relative growth prospects. But the yield spread actually captures many of these other variables given it is a representation of interest rate prospects.
Right now the spread on the ten year bond is collapsing as US economic prospects improve and Australia’s deteriorate. Here is the three year chart:
And longer term:
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