The Australian Dollar[1] made a new low for the year in the fourth quarter, stopping short of the November 2020 low of 0.6991. It appears that the impact of commodity prices and long-term interest rates on the currency took a back seat to short-term interest rates and the strength of the US Dollar[2].
Will commodities get AUD traders attention?
The price of iron ore was only slightly weaker through the fourth quarter after collapsing in the third. However, energy commodities surged into the end of the year.
The situation on the commodity front is best illustrated by the RBA commodity index. The index is weighted according to Australian exports, and it remains at elevated levels. The charts above from the RBA highlight the strong contribution from commodities to the trade balance.
It should be noted that the terms of trade are at cyclical highs. This is a significant boost to the Australian economy.
Despite the perception of a slowdown in China, commodity exports continue to improve the bottom line.
Rate Spreads Might Play a Role for AUD?
Looking at interest rate differentials, both the 1 and 10-year bond yield spreads of Australia over US peaked at about the same time that the AUD/USD[3] hit the November high. As both spreads contracted, AUD/USD[4] went lower. However, the 10-year spread appears to have had less of an impact than the 1 -year - as shown in the chart below.
This was also occurring at a time when the US Dollar was appreciating across the board.
Narrowing interest rate differentials and US Dollar strength came at a time when the Federal Reserve turned more hawkish.
