The narrowing in Australia’s interest rate premium highlighted by the rise in two-year government bond yields in the US in line with two-year yields in Australia for the first time in almost 20 years has contributed to the Australian dollar weakening from US$0.79 a few weeks ago to US$0.76 now. We expect this trend to continue next year as the Fed starts to raise US official interest rates at a faster pace while the RBA keeps rates in Australia on hold. If the iron ore price were also to fall back from US$68 per tonne to closer to US$50 as we expect, then the dollar may weaken to around US$0.70 next year.
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