Australia-U.S. Job Gap Is Mirrored in Yields: Chart of the Day

Australia’s seven-year economic outperformance of the U.S. is drawing to a close as the mining boom that powered the South Pacific nation winds down.

The CHART OF THE DAY shows how Australia’s jobless rate -- forecast to rise to 5.9 percent in June -- is near convergence with the U.S. level. The lower panel shows the yield premium Australian 10-year notes offer over U.S. debt of similar maturity shrank to the least since 2006, while the Aussie dollar has remained resilient above 90 U.S. cents.

The surge in resource investment to meet Chinese demand that saw Australia shrug off the global financial crisis is winding down, weighing on an economy restrained by an elevated currency and government cutbacks. The U.S. jobless rate has been higher than Australia’s for the past seven years after generally being the lower of the two from the presidency of Ronald Reagan through to George W. Bush’s term.

“It’s a return to the norm because what made us so exceptional in the past decade is now working in the opposite direction,” said Adam Boyton, chief economist for Australia at Deutsche Bank AG in Sydney. “The pressure will be for a narrowing in the 10-year bond spread and a weaker Australian dollar in 2015.”

The Reserve Bank of Australia has kept its benchmark rate at a record low 2.5 percent for 11 months and flagged a period of stability in borrowing costs. The Federal Reserve is scaling back monthly bond purchases and markets are betting the first increase to its key rate could come by June.

For the RBA, eroding advantages may be welcome if they deliver a weaker currency, which Governor Glenn Stevens and his board have signaled they want. The Australian dollar averaged about 92.50 U.S. cents since April 2007 -- when the era of a lower Australian jobless rate started -- compared to about 71.50 cents in the preceding 24 years when the unemployment rate usually exceeded the U.S. level.

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