Commodities and the Australian Dollar

The Australian Dollar – AUD, has fallen of late (USDAUD) due to the relationship of commodities and the Australian Dollar. Australia barely had a recession, with only one quarter of negative growth. It is a big commodity supplier to China, Japan, Korea, and other Asian nations. As the Asian economies have led the way out of the recession Australia has prospered by selling coal, steel, copper, natural gas, wheat, processed meat to China and other Asian nations, as well as to the rest of the world. The AUD has risen about thirty percent against the US dollar – USD – since 2006. However, the threat of another dip in the recession has Forex traders concerned that Australia will suffer from the relationship of commodities and the Australian Dollar.

Other growing economies are likewise concerned about the prospect of a substantial economic downturn. Brazil, India, and Russia have all experienced growth in both their economies and their currencies, the Real – BRL, Rupee – INR, and Ruble – RUB. Russia is a major exporter of energy products to Europe where the PIIGS sovereign debt crisis still threatens financial turmoil and a downward spiraling Euro – EUR. While the issue for Australia is largely commodities and the Australian Dollar it is a falloff in outsourcing of technical services to the West and Europe that may plague India and a fall in industrial use of natural gas and crude oil products in Europe that may affect Russia. Brazil has seen its Real rise so fast that the nation is erecting tariff barriers against imports from China. All of these economies are doing well internally but may suffer the effects of the growth of their currencies. In analyzing commodities and the Australian dollar traders need to understand how long another dip the recession might last and just when commodity purchases may fall off and when they might resume when the recession finally mends itself. In meantime the AUD has fallen nearly five percent this month in the USDAUR pair and a percent and a half in the last week. It has done better in the EURAUD pair as the Euro has faltered due to the ongoing debt crisis in the EU.

When the Australian Dollar was rising it was seen, by some, as a safe haven, just like the US Dollar. However, the dependence of the Australian economy on commodity exports, which has driven the AUD up makes its status uncertain at a time when the worldwide demand for some commodities could weaken. It is the interrelationship of commodities and the Australian Dollar that commonly drives AUD trading. Another issue is risk tolerance. When investors perceive there to be substantially increased risk in the world they invest in what they perceive to be the more stable currency. That has often been the Australian Dollar in the last couple of years. However, the possibility of both commodities and the Australian Dollar going down in price has sent investors back to the US Dollar, Yen – YEN, and Swiss franc – CHF. (USDAUD, AUDYEN, AUDCHF) As the European debt crisis and threat of an economic downturn unfolds traders will watch the AUD carefully. If the Greek debt crisis, followed by the Italian crisis rectify themselves we may see a rebound in commodities and the Australian Dollar. As always we are not suggesting that Forex traders trade the AUD or ignore it. Rather we offer this discussion as an example of thinking about the fundamentals of a major currency.