Interest rate differentials to drive AUD
- Last Updated on 09 February 2012
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Investors continue to prefer commodity currencies despite the decline in commodity prices. Since its peak in April the Thomson Reuters/Jefferies CRB Commodity Index has declined 17.8%, while the AUD/USD has declined by only 7%. The tepid decline in the value of the AUD/USD also comes in the face of the European debt crisis and a slowing Chinese economy. Thus we may assume that investors continue to buy the AUD based on interest rate differentials and perhaps the country's AAA credit rating.
The RBA has cut interest rates in their previous two consecutive meetings though rates currently stand at 4.25%, more than 175 bp above the next G-10 currency the NZD at 2.50%. The interest rate differential is still remarkable. While a continuation of the European debt crisis may weigh on the higher yielding AUD, should positive market sentiment return there may be a return of the carry trade, fueling further support for the AUD.