Commodities still the main driver of the Australian dollar

The Australian dollar has rallied in the last 2 weeks from a low of US75c to around US76.60c against the greenback, defying analysts’ predictions that the currency would tumble if the US Federal Reserve stuck to their plan to hike rates further next year and if new tax legislation in the US was passed.

If the news is correct, the Fed is expected to lift interest rates next year a minimum of 3 times with a fourth hike also a distinct possibility which will put the US dollar interest rate and yield higher than the Australian dollar for the first time in almost 2 decades which you would think would generate huge interest in the US dollar at the expense of the Aussie

Also, A new tax legislation that was introduced by US President Donald Trump which envisions cutting the corporate tax rate to 20 percent among other things is sure to be signed into law this week by the US president after his own Republican party passed the tax bill through both the Senate and the house of representatives.

It is seen as the biggest tax change in a generation and if Republicans are to be believed, will put a rocket under the US economy as companies bring back their profits to the US which will generate significant demand for the US dollar.

So why is the Australian dollar remaining so resilient in the face of such pressure? Surely higher rates in the US, as well as a soaring demand for the greenback on the back of corporate tax cuts, should be negative for the Australian dollar?

Tax legislation and interest rates aside, if we look back over the last decade or so the main driver of the Australian dollar has been commodity prices such as copper, and Iron ore, Australia’s biggest export which has rallied over 25 percent in the last 2 months and further gains are expected.

So if you are listening out there, it may be a good strategy to keep an eye on commodity prices and although some external factors may influence the Aussie dollar the Iron ore price is going to be the one to watch out for.

This article was written by FIBO Group analyst Andrew Masters.

This article was originally posted on FX Empire

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