Australian dollar may now be tied to oil

Financial and commodity markets analytics

The Australian dollar’s fortunes have long been tied to the price of iron ore, the country’s biggest export, and the recent rally in the commodity on the back of growing demand from countries such as China is believed to be behind the substantial recovery in the Aussie dollar against its US counterpart.

In fact, iron ore is the main barometer for many analysts following the Australian dollar and it seems up until now this has been the correct strategy to take.

"A common tool for estimating the terms of trade, and partially valuing AUD/USD in real time, has been the iron ore price. The intuition behind the idea is that iron ore is Australia's largest export so its price has an important influence on AUD," says Joseph Capurso Currency Strategist at Commonwealth Bank of Australia.

Although iron ore is so important to the Australian market, two other commodities are beginning to take on an equally important role, which are namely oil and gas, and some players in the market are unaware they have overtaken iron ore in terms of production.This may also be a contributing factor to the surge in the Australian dollar especially if we consider the recent rally in the oil price.

Mr Capurso believes investors should be keeping a close eye on the price of oil and gas as this is now a better reflection of the Australian economy and a better representation of the Australian dollar’s future

"Australian oil and gas production now exceeds iron ore production. Changes in oil prices are better correlated with changes in AUD/USD than changes in the iron ore price." Mr Capurso added.


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