AUD/USD rally contradicts breakdown in 2Y AU-US yield spread

• The 2-year yield spread no longer guides the exchange rate?

AUD/USD bottomed out at 0.7501 on Dec. 8 and rose to a high of 0.7979 yesterday. The 6.37 percent rally from the December low contradicts the drop in the 2-year Aussie-US yield spread.

Yield spread chart

• The 2-year spread fell into the negative in November and remained depressed near zero levels throughout December.
• As of writing, the Aussie 2-year bond yields only 6 basis points (bps) more than its US counterpart.
• The declining spread indicates the Aussie dollar is no longer a high yield currency.

Still, the AUD/USD pair has rallied more than 6 percent from the December low of 0.7501. Clearly, the correlation has broken down.