AUD/CAD Analysis: 10-Year Bond Yields, Interest Rate Differentials, UIP, and Carry Trade
1. Current Bond Yields and Interest Rate Differentials
Australia 10-Year Bond Yield: 4.28% (as of June 4, 2025) .
Canada 10-Year Bond Yield: 3.20% (as of May 30, 2025) .
Yield Spread:
4.28% (AUD)−3.20% (CAD)=+1.08%
Australia’s higher bond yield provides a carry advantage for AUD.
Policy Rate Differential:
RBA Rate: 3.85% (cut by 25bps in May 2025) .
BoC Rate: 2.75% (held steady in April 2025) .
Rate Spread:
3.85% (AUD)−2.75% (CAD)=+1.10%
2. Uncovered Interest Rate Parity (UIP)
Theory: The AUD should depreciate against CAD to offset the +1.10% rate spread, eliminating arbitrage opportunities.
Reality: UIP often fails due to risk premiums and market dynamics. Despite Australia’s higher rates, AUD/CAD may remain supported if investors prioritize yield over currency depreciation risks.
3. Carry Trade Dynamics
Mechanics: Borrow CAD (lower rate) to invest in AUD assets (higher yield), profiting from the +1.08% yield spread.
Current Viability:
Opportunity: The yield spread and rate differential favor AUD, making the carry trade attractive.
Risks:
AUD Depreciation: If UIP holds, AUD could weaken, eroding carry profits.
Global Uncertainty: US tariff tensions (cited in RBA’s May 2025 decision ) may increase AUD volatility.
BoC Policy: Canada’s cautious stance on tariffs and stable rates supports CAD stability.
4. Key Economic Context
Australia: Recent RBA rate cuts (to 3.85%) reflect concerns over global trade risks but maintain a yield advantage over Canada.
Canada: BoC held rates at 2.75% in April 2025, citing tariff-related uncertainties but projecting stable inflation near 2% .
Summary Table
Metric Australia (AUD) Canada (CAD)
10-Year Bond Yield 4.28% 3.20%
Policy Rate 3.85% 2.75%
Yield/Rate Spread +1.08% (bond), +1.10% (policy) —
Carry Trade Bias Bullish for AUD Bearish for CAD
Key Risks Global trade tensions, RBA dovishness BoC tariff caution, stable inflation
Conclusion
AUD/CAD Outlook: Moderately bullish for AUD due to yield and rate advantages, but UIP suggests potential AUD depreciation.
Carry Trade: Profitable if AUD stability persists, but monitor tariff developments and BoC policy shifts.
Trade Strategy: Favor AUD longs on dips
#AUDCAD #CAD #AUD
1. Current Bond Yields and Interest Rate Differentials
Australia 10-Year Bond Yield: 4.28% (as of June 4, 2025) .
Canada 10-Year Bond Yield: 3.20% (as of May 30, 2025) .
Yield Spread:
4.28% (AUD)−3.20% (CAD)=+1.08%
Australia’s higher bond yield provides a carry advantage for AUD.
Policy Rate Differential:
RBA Rate: 3.85% (cut by 25bps in May 2025) .
BoC Rate: 2.75% (held steady in April 2025) .
Rate Spread:
3.85% (AUD)−2.75% (CAD)=+1.10%
2. Uncovered Interest Rate Parity (UIP)
Theory: The AUD should depreciate against CAD to offset the +1.10% rate spread, eliminating arbitrage opportunities.
Reality: UIP often fails due to risk premiums and market dynamics. Despite Australia’s higher rates, AUD/CAD may remain supported if investors prioritize yield over currency depreciation risks.
3. Carry Trade Dynamics
Mechanics: Borrow CAD (lower rate) to invest in AUD assets (higher yield), profiting from the +1.08% yield spread.
Current Viability:
Opportunity: The yield spread and rate differential favor AUD, making the carry trade attractive.
Risks:
AUD Depreciation: If UIP holds, AUD could weaken, eroding carry profits.
Global Uncertainty: US tariff tensions (cited in RBA’s May 2025 decision ) may increase AUD volatility.
BoC Policy: Canada’s cautious stance on tariffs and stable rates supports CAD stability.
4. Key Economic Context
Australia: Recent RBA rate cuts (to 3.85%) reflect concerns over global trade risks but maintain a yield advantage over Canada.
Canada: BoC held rates at 2.75% in April 2025, citing tariff-related uncertainties but projecting stable inflation near 2% .
Summary Table
Metric Australia (AUD) Canada (CAD)
10-Year Bond Yield 4.28% 3.20%
Policy Rate 3.85% 2.75%
Yield/Rate Spread +1.08% (bond), +1.10% (policy) —
Carry Trade Bias Bullish for AUD Bearish for CAD
Key Risks Global trade tensions, RBA dovishness BoC tariff caution, stable inflation
Conclusion
AUD/CAD Outlook: Moderately bullish for AUD due to yield and rate advantages, but UIP suggests potential AUD depreciation.
Carry Trade: Profitable if AUD stability persists, but monitor tariff developments and BoC policy shifts.
Trade Strategy: Favor AUD longs on dips
#AUDCAD #CAD #AUD
Disclaimer
The information and publications are not meant to be, and do not constitute, financial, investment, trading, or other types of advice or recommendations supplied or endorsed by TradingView. Read more in the Terms of Use.
Disclaimer
The information and publications are not meant to be, and do not constitute, financial, investment, trading, or other types of advice or recommendations supplied or endorsed by TradingView. Read more in the Terms of Use.