Australian Dollar Climbs Higher As Commodity Boom Fuels Another Record Trade Surplus – Exchange Rates UK

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Lockdowns ended in Sydney this week and should boost the Aussie. We have already seen sentiment surveys rise sharply and hard data should soon follow.

The AUD has further support from the commodity boom and Australia posted yet another record trade surplus.

The energy crisis is a net positive for the Aussie as it not only puts upward pressure on metal prices, Australia is a net exporter of natural gas and large exporter of coal.

Wednesday’s session is off to a wobbly start in Europe with the FTSE lower by –0.6% and most risk markets in the red. The energy crisis, inflation and the likelihood of tighter central banks remain the focus and ‘stagflation’ is a word cropping up more and more to describe the current (and likely worsening in the future) environment of high inflation and curbed growth. Tuesday’s IMF report added to this view and did not paint the rosiest of pictures with global growth downgrades.

As for currencies, there are winners and losers in this environment. The rally in oil has boosted the Canadian Dollar, the Norwegian Krone and the Russian Ruble. But it has also boosted other commodities as their production is heavily reliant on energy. Nickel and aluminium factories have been forced to close by rocketing energy costs, tightening supply even further and sending prices spiralling. This has particularly benefited the Australian Dollar and the Australian economy which are large exporters of metals and even net exporters of energy (importers of oil but large exporters of coal and gas). The Australian Dollar had made large gains in recent weeks against the currencies of commodity importers like Japan, New Zealand Dollar and the EU, while it has continued to slide against big oil exporters such as Canada and Norway.

Another Record Trade Surplus

While prices of one of Australia’s largest exports, steel, fell sharply due to the Chinese property market scare triggered by Evergrande, gains in other commodities ensured yet another record trade surplus.

“In terms of official data, in August Australia recorded its 44th consecutive monthly trade surplus, easily beating expectations by setting another record high at $15.1bn. Iron ore remains the key driver of the upswing in the trade surplus over the past year or more, but in general, these are heady days for exporters of most industrial commodities,” noted Westpac this week.

They also make the point that the energy crisis should act as a general tailwind for the Aussie.

banner“Energy prices have dominated the headlines lately and while Australia is a net importer of oil, it is a net exporter of energy, with liquefied natural gas already a top 5 export. Coal prices continue to soar on a combination of demand and supply factors. This surge means Australia’s historically very rare run of current account surpluses should continue for some time yet, providing insulation for A$ when global risk sentiment sours.”

Commodity prices have helped keep the Aussie bid against its neighbour the Kiwi even as the RBNZ raise rates and the RBA insist that it won’t raise rates until 2024. Sentiment is also helping as lockdowns end in Sydney and NSW and a bounce back in data is expected.

Lockdowns Finally End

Soft data is already rebounding as lockdowns are lifted and hard data is expected to follow suit.

” The high and rising vaccination rates provide an exit path from lockdown. Business confidence has rebounded sharply on that prospect, rising to elevated levels. The confidence index rose 19pts to +13, a well above average reading.

In NSW, the sense of relief after a challenging winter saw confidence surge, up 42pts to +27…For Victoria, which is set to reopen in late October, confidence rose 16pts to +5,” reported Westpac.

If previous patterns are repeated, data should bounce back strongly as pent-up demand and postponed spending boost the economy. This could be partially priced in to the Aussie already, but should act as another tailwind and should the economy strengthen sufficiently, the RBA could taper some more early next year.