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  • Writer's pictureCrest Economics

Australian Dollar Rallies from a Surge in Commodity Prices- December 2020

The Australian Dollar surged last week to 0.75 USD as the AUD/USD pair traded at highs not recorded since June 2018. There are several factors driving this unconventional trend: the primary reason being an uplift in global market sentiment. Optimism about a vaccine has boosted hopes about a swift rebound in global growth next year. Soaring iron ore and commodity prices are also underpinning a higher Australian dollar. The latest price spike saw iron ore break through an 8-year high to US$160 per tonne. Westpac’s chief economist Bill Evans said that the gains in iron ore exports will vastly overcompensate for tariff-hit wine, barley and coal exports. The upward pressure on the local currency from Australia's most valuable export commodity was also followed overnight by growth in China's renminbi. A correlation between the local currency and that of our largest trading partner is evident despite souring China-Australia relations.

Furthermore, the AUD/USD exchange rate is benefitting from a weaker US Dollar which continues to plumb to multi-year lows. The AUD rallied as market participants priced in a Joe Biden presidency. Potential stimulus talks in the US will work against the value of the greenback as further injections will drive higher consumption for commodities. As Australia is a major exporter of hard commodities such as copper, aluminium and coal, the AUD will continue to see a potential rise.

On the other side of the globe, markets have been brought to a cliff hanger as pessimism grows that a trade deal between the UK and EU before the end of the month won't be forthcoming. Pound plunged last week after UK prime minister Boris Johnson warned it is 'looking very, very likely' that no-deal by December 31 is a strong possibility. This has resulted in modest rises in the AUD/GBP to 0.56 Sterling through the first half of the week as the pressure on Sterling amounts. With core issues of fisheries, governance and even playing field are keeping negotiators from a deal, it is likely we will see greater volatility in the GBP/AUD exchange rate.

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