Overview

• In understanding the drivers of the rise in AUD/USD from 0.75 in early December to above 0.81 in January, higher commodity prices have justified much of the move
• Commodity price gains are though in large part the simply the flip-side of broad USD weakness, though the strong global growth backdrop has also been supportive
• NAB see good reason for iron ore and coal prices in particular  to both come lower this year. Our expectation for a somewhat softer overall ‘terms of trade’ is one important factor behind our forecast for AUD cross-rate underperformance. If commodity price instead hold firm, this implies upside risk to our AUD forecasts
• Also underlying our forecast has been the belief that positive risk sentiment won’t be as persistent as it was in 2017 when periodic bouts of risk aversion proved short lived. This is of course currently playing out in global equity markets, but has not yet shown up in other asset classes, including FX
• Finally, as and when interest rate considerations come back to play a bigger role driving currencies, the negative spread versus US equivalent rates out to two years will surely exact a toll on the AUD, especially with the RBA seemingly on hold  at least until H2 2018

For further details, please see the attached documents:

• Global FX Strategist (PDF, 2mb)