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Australian dollar to 75c?

The Australian Dollar has seen a strong bull rally - up 12% from its March lows. Now bulls are edging for the currency to push higher.

AUD/USD slowly creeping up to that 75c mark, not seen since May 2018

A possible push of the Australian dollar to 75c against the U.S dollar is a level not seen since May 2018. During that period where it first dipped below 75c, there were many retests in the following months before we finally saw a sold push below the 75c mark. This historical dynamic may require bulls to have strong momentum if they want to pass that 75c mark.

The Australian Dollar is noted for being a commodity currency – that is, the value of their currency against other currencies is mainly correlated from the price of commodities they export. You can see this correlation with the price of Iron and Copper.

That 12% push from its March low has been due to its largest export partner, China, seeing their demand for Australian resources sour amongst the Coronavirus pandemic and their souring relationship regarding barley and wine exports.

Australian Dollar underpinned by Commodity Demand

When put side by side, the correlation between Copper and the Australian Dollar is clearly visible.

Australia’s Minister for Resources, Keith Pitt told the Financial Times in a recent interview that the mining and energy sectors were underpinning the domestic economy, which has been battered by a second wave of the Coronavirus that has forced many businesses in Melbourne to shut their doors for another couple of weeks. He also states that “62% of China’s Iron ore imports came from Australia in 2019-2020,” reiterating that commodity correlation.

However, more institutions are bullish on the Australian Dollar. Notably. Commonwealth Bank of Australia stated that “the recent rally in some commodity prices seem unstoppable,” hinting at the idea that commodity prices are an essential driver of the Australian Dollar.

It also helps that over the past couple of weeks; there has been a trend of de-dollarisation amongst traders and investors. This may be due to a mix of factors, including a 34% rally in Gold, unprecedented fiscal stimulus and quantitative easing, and a strong rally in U.S equities forcing investors and traders out of the U.S dollar.

If we continue to see strong demand for commodities such as Copper and Iron, we may see both the Australian Dollar and the prices for those rally in tandem together.

Speaking of Copper – a senior analyst here at BlackBull Markets, Anish Lal did an excellent technical overview video on whether copper will hit 80c – You can watch it here.

Safe trading!

Commodity currencies strengthen as demand for oil and metals increase

Commodity currencies are set to advance as manufacturing and oil usage rise across the world.

The returns of the CAD & AUD against the USD. Note: Lower is better as it means the USD is depreciating against the respective currencies.

The Australian dollar and the Canadian dollar have been stuck within their respective consolidation zone, strengthening over the past couple of days. As the correlation between commodity currencies and commodity prices remain relatively strong, with the Bloomberg commodity index advancing 2.5% to 63.24, the highest since the start of April.

Commodity currencies getting a boost from demand

As China’s oil demand starts to reach pre-Coronavirus levels, manufacturers have started to purchase more iron and copper from Australia. However, tensions between the two countries have slowly risen, possibly dampening the likelihood of a breakout. In this case, China slapped an 80% tariff on Australian Barley exports, a $330 million industry. Many analysts speculate that these tariffs are in response to Australia’s strong push for an independent investigation into China's response regarding the Coronavirus. However, it is more likely due to the Australian government subsidizing exports barely, enabling exporters from Australia to sell them barely at lower than market prices – a process also known as “dumping.”

However, Adam Kibble, an investment specialist at Inisght, is bullish on the Australian dollar, seeing it rally to 70c against the greenback by year-end. Furthermore, he told Bloomberg that “Exiting the virus earlier [Australia], compared to Europe and the U.S., will be very positive for the Aussie.”

Moreover, with the Canadian dollar being sensitive to the change in oil prices, the price of the black gold has strengthened the loonie against the U.S. dollar. As a result, the boost cushions agriculture and commodity exporters into the U.S. Furthermore, other oil sensitive currencies such as the Norwegian Krone and Russian Ruble have strengthened over the past two days as demand for oil increases.

In spite of these currencies rising, today was generally a risk-off day after the risk-on rally yesterday. Here are the leading market moves:

As a senior analyst at Blackbull markets, Andre Almedia did some excellent technical analysis on the USD/CAD pair. You can watch it here.

A pair for the recovery

What currency pair is poised to bounce back in the recovery? Since the start of the Coronavirus, the Australian Dollar has depreciated sharply against the US Dollar. However, history has shown to repeat itself in regards to economic shocks and this currency pair.

AUD/USD Pair, Weekly Candles

During the 2008 Financial Crisis, the AUD/USD pair followed a somewhat explainable trend – it depreciated at the peak of the recession and appreciated once economic activity and the recovery started in mid-2009.

AUD/USD,  Weekly Candles

Whats the big driver for the Australian Dollar?

The Australia Dollar has been considered by most as a commodity currency – in that it tracks the price of the commodities it exports – mainly iron, copper, and coal. In economic downturns like the one we are currently facing and 2008, manufacturers who use iron and copper tend to slow down their production or halt it together. Lower demand for iron and copper not only implies a lower price for said commodities, but it also means fewer exports from Australia, therefore less demand for the Australian Dollar.

AUD/USD against Coal over 10 years
AUD/USD against copper over 10 years
AUD/USD against Iron Ore over 10 years

If we take into account that investors tend to decrease their exposure in risky assets and safer assets such as the US Dollar, Treasuries, and Gold, there is a compounding effect on the AUD/USD as there is less demand for the AUD and an increase in demand for USD.

Is the road to recovery in sight?

The thesis of a long AUD trade hinges on one fundamental question – do we see a recovery in sight? A difficult question, as it implicitly asks to predict a bottom in the stock market, productivity, and in this case – the effects of the Coronavirus. Signs of an economic recovery are showing, albeit tentatively. Countries are slowly emerging out of lockdown, oil inventory buildup in the United States was 2.7m less than predicted, and there have been talks of creating “mini bubbles” with countries. But, if we take a look historically at what the market movements have been in the previous recession.

SP500 during the 2008 Recession
SP500 during the current Coronavirus pandemic

A similar pattern emerges

After the initial drop in 2008, there was a short bull period before another further drop in prices in early 2009. A similar pattern can be seen in the 2000 – 2005, following major events such as the dotcom burst, the September 11 attacks alongside the further correction in 2002. If history repeats itself, we may likely see a similar pattern in the following months. Talks of a “second wave” of coronavirus cases, alongside earnings season and muted demand across all sectors may be the catalyst for a drop asset prices.

It is clear that the AUD/USD pair appreciating is contingent on manufacturers dependent on their exports restarting production. An implicit proxy for this is the directional trend of the market. As stated above, history shows that there may be another depreciation in the Australian Dollar and the market. However, history also shows that once manufacturing activity does restart, the Australian Dollar is likely to appreciate. Furthermore, headwinds for the Australian Dollar include extensive quantitative easing and expansionary fiscal policy in the United States, which has historically driven the US dollar down.

Is it time to think about a position in the Australian Dollar?

Here is Anish Lal on his short term analysis on the recovery of the Australian Dollar and the ASX in light of geopolitics. Watch the video hereOr alternatively, click the thumbnail below,