I've written about shadow rates quite a bit on this blog, with some background in this post. It is basically an estimation of the effective Fed Funds rate if it could go negative, given information from the yield curve.
Relative policy rates are important when thinking about FX rates, but with the Fed funds rate at zero, this differential appears to be less meaningful for FX than it has been in the past.
But the picture is different when using shadow rates, which have actually been falling since the start of the year. With Australian rates on hold, this has served to widen interest rate differentials at the front end of the curve.
This is different to the long end of the curve, where differentials have narrowed more recently. The relationship at the long-end of the yield curve and the AUD/USD is a shifting one, partly because there is a lot of co-movement between US and Australian debt markets.
Commodity prices continue to slide, with iron ore in particular now pretty close to the lows seen in 2012. Furthermore this weakness looks set to be more persistent.
The level of commodity prices is still high, although there are now more marginal commodity producing business now than there was back in 2006. So prices don't have to sink to the same levels to cause more pain.
The stronger AUD is exacerbating this problem, with the widening differentials to shadow rates perhaps providing some explanation as to why this is the case.
