Interest rate differentials are widely seen as an important driver of currencypairs. By way of example, AUD/USD moved in line with short-end interest ratedifferentials from mid-2011 to around mid-2012 (see Figure 1). Given therelative stability of front-end US rates over the past few years, those moves inAUD/USD therefore largely reflected a re-pricing of market expectations for theRBA. But since the second half of 2012, the gap between short-term Australianand US rates has been fairly stable. AUD/USD has, of course, been much lessstable. But that’s not to say interest rates aren’t relevant for AUD/USD. Ratherit’s more a question of what interest rate(s) we should be looking at. InFigure 2 we have plotted AUD/USD against the US 10-year Treasury yield. Asthe chart shows, the levels relationship between the two has been quite robustover the past 18 months or so. The correlation also appears particularly tightover the final months of 2013.
Read the full report: FX Research
Deutsche Bank