📝Yield Spreads And U.S. Risk Premia Supporting AUD/USD Rise: Westpac Strategy

We have a robust short-term AUD/USD model that decomposes AUD/USD price action into its key underlying short term macro drivers, namely, commodity prices, 2yr and 10yr interest rate differentials and market stress/turbulence in the US and China. The model’s coefficients are correctly signed and intuitive. The model is estimated from Oct 2019 to Sep 2022.

According to our methodology, very little of AUD/USD’s US2 cent rebound is attributable to commodity prices. Iron ore prices are at 7-month highs, but aggregate commodity indices are overall steady the couple weeks.

The risk mood in China’s markets, which enters our model’s calculations via a “China markets stress index”, has firmed slightly, but not enough to meaningfully lift AUD/USD.

A notable firming in AUD-USD yield spreads in AUD/USD’s favour on the other hand accounts for around US1 cent in AUD/USD upside over the last couple weeks, while a meaningful slip in US risk premia metrics, such as the VIX and high yield credit spreads, accounts for another US1 cent upside.

Altogether, we think AUD/USD’s recent US2 cents rebound in the last two weeks is fully explainable in terms of the much-improved US risk mood and firmer AUD-USD yield spreads, in equal par

- Westpac