AUD/USD: A strong tie to financial commodities – ANZ

Iron ore has not provided a good signal of AUD directionality for some time and economists at ANZ Bank note that the aussie has had a stronger connection with commodities with a financial aspect such as gold, oil and copper.

Key quotes

“With iron ore prices above USD100/t, many suggest the AUD could be higher. We think this is simplistic and doesn’t account for a fundamentally weaker relationship since 2017.” 

“It’s evident that since 2017 the AUD has traded much more closely with commodities that have a financial aspect: copper, gold and oil. These have higher speculative trading volumes and are generally more subject to the ebbs and flow of broader risk sentiment.”

“The erosion of the AUD’s yield advantage in recent years has left it susceptible to ‘risk-on, risk-off’ episodes, helping to explain its closer ties to ‘financial’ commodities. Trading behaviour since the pandemic shutdowns began in March support this, with equity markets continuing to dictate the direction of the AUD.”