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Australia's Week in Charts: Nation Divided, Yield Premium Redux

  • Business bulls at odds with consumer bears on weak currency
  • Yield premium widens as swaps see RBA rate staying above Fed’s

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Australia’s companies and households remained at odds this week, highlighting the central bank’s dilemma as it tries to work out whether keeping the cash rate at a record-low of 1.5 percent is best for the national interest.

The divergence follows the Australian dollar’s plunge, which has helped many businesses boost competitiveness even as it hit the global purchasing power of the nation’s shoppers. The Aussie has remained resilient in the face of a shrinking yield premium, but that gap is widening again on prospect that the Federal Reserve will slow its tightening cycle.

The following charts highlight the differing perceptions of corporations and individuals, and the outlook for the Aussie dollar.

Companies are full of optimism, and have been for almost four years. Consumers have been pessimists for most of the same period, and remained so in July for an eighth straight month. A 25 percent depreciation in the nation’s currency over the past five years has been a boon for exporters and those that compete against imports. In addition, while a spike in commodity prices in the past 12 months sent profits surging, almost none of that money has made its way to workers.

The Aussie dollar stopped sliding some time ago though, and the recent rebound in the nation’s yields may help to drive it through the top of its recent ranges. The extra yield benchmark 10-year notes Down Under offer over similar Treasuries has more than doubled since touching a 16-year low of 15 basis points in late June.

The pickup in yields and the Aussie may owe much to traders’ willingness to disbelieve central bankers in Washington and Sydney. Looking at comments from Fed Chair Janet Yellen and RBA head Philip Lowe would seem to indicate the U.S. cash rate will rise above Australia’s within 18 months, something that hasn’t occurred since 2000. Swaps traders though, continue to price higher rates Down Under.

Lowe’s repeated statements indicating an unwillingness to move rates is falling on deaf ears, just like Yellen’s determination to meet U.S. policy makers’ forecasts and borrowing costs four times between now and the end of 2018.

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