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Summary
- The Australian dollar rose to a 3-year high last week to reach USD0.7976 on 24th of February.
- The surge in Australian dollar was on the back of a price surge in commodities like iron ore and copper.
- However, the surge in AUD was short lived as it retreated 3.5% over the week on account of a bearish commodities and equities market.
The previous week saw the Australian dollar on a roll, surging on the back of increasing commodity prices. On the 24th of February, the Australian dollar touched a three-year high at USD0.7976. Rising commodity prices were at the heart of these gains during the day.
However, the AUD has pared some gains over the week and reached a value of USD0.7697 on 26th of February, representing a 3.5% fall. This occurred in the wake of a slowdown in bond markets which spurred a slowdown in other risk assets. The Aussie dollar came down from its highs after investors started dumping higher risk commodities and equities.
Commodity Prices and Other Factors
Prices of commodities usually rise when inflation is expected to increase. With most central banks agreeing to extend the monetary policy measures, there is an imminent rise in prices expected for the coming months.
Being a commodity currency, the Aussie dollar is highly susceptible to these commodity price changes. The rising commodity prices offer a hedge against swiftly increasing inflation. Surging iron ore, copper, oil, lumber and milk prices led to these results.
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Copper prices
Copper prices went up USD9,000 per tonne, a 10-year high whereas Nickel prices soared above USD20,000 a tonne, a first in 7 years. Ten-year bond yields in Australia, the world’s 6th largest copper producer, saw a 4 basis points decline to 1.55% on Tuesday. Moreover, the dividend announcements for Australian mining companies have added to the AUD price surge during the previous week.
Additionally, the recent developments surrounding the pandemic vaccines were also an underlying factor behind the strength of the AUD. The rollout of the vaccines as well as the decreasing unemployment rate have benefitted the Australian economy, and subsequently the AUD greatly.
The extension of the RBA’s bond buying program added to the optimistic outlook for the Australian economy.
10-year Australian bond futures
On Friday, the 10-year Australian bond futures went down 23 ticks to reach their lowest in almost a year at 98.045. This gradually improved to 98.2600, despite a total loss of 30 ticks during the week.
Additionally, the RBA had to launch an unscheduled offer to buy AUD3 billion worth of debt for 3 years.
