AUD’s impressive run-up has stumbled but the downside seems limited. Key energy and bulk commodity prices are pushing higher once again, even as supply-side adjustments unfold and China locks down her economy to battle a Covid outbreak. Coking and thermal coal prices have clawed back almost half the spike triggered by Russia’s invasion in late February.
This bullish commodity backdrop has helped AUD defy a volatile global risk mood and a firmer USD in recent weeks. DXY’s run-up from 96 to 100 in late Feb would have ordinarily coincided with an AUD pushing well below 0.70. But as shown as over, AUD’s sensitivity to the USD has been declining for some time. AUD’s rolling one-year correlation with DXY actually turned slightly positive in early April, briefly hitting its highest levels since 2005.
AUD’s traditionally positive correlation with global stocks is barely positive at the
moment too. AUD’s shifting correlations raise questions about whether it has lost its reliable
qualities as a “risk-off” hedge. As shown over, all the major global equity market drawdowns over the last 35 years coincided with notable declines in AUD. But AUD was not an effective hedge in the latest 14% MSCI (ex-Australia) drawdown that followed Russia’s invasion.
That doesn’t necessarily imply a structural change is afoot. This global equity market drawdown has been associated with one very unusual development – commodity prices did not fall like they usually do when equities decline. Instead, commodities surged, such as the nature of the shock to the global economy triggered by Russia’s invasion. Renewed gains for commodity prices will leave AUD supported on key crosses for a while yet, giving the appearance of a currency that is defying the risk mood and ongoing USD gains. We expect further AUD gains toward the 0.77-0.78 region in 2022H2 and look for retracements into the 0.73s as opportunities to buy.
Our overall view for AUDUSD remains bullish, we’ll continue to buy AUD on dips. We have a strong view AUD could hit 0.8000 within the year however we first need to break the 0.760 resistance.
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