Australian Dollar Recovery Could Endure as Baltic Exchange, Commodity Prices Shows Chinese Demand is Solid

- Baltic Exchange data shows global trade continues its resurgence
- Commodity trades and prices therefore likely to remain supported
- The Australian Dollar's recovery can extend if commodity dynamics remain robust
- Dr. Copper sending the right signals

Image © Adobe Stock

Secure a retail exchange rate that is between 3-5% stronger than offered by leading banks, learn more.

The Australian Dollar will likely remain supported as long as a recovery in the trade of basic commodities continues, which is likely given ongoing signs of voracious demand from China.

A key measure of the health of global trade is the Baltic Exchange's sea freight index which rose for its sixth consecutive week on the week ending Friday 26, meaning the index has surged 60% so far this year and has recovered the losses brought about by the coronavirus pandemic.

The Baltic Exchange's index is seen as a key indicator of the health of global trade as it reflects the volume of goods en route to market via large ships; of which China is a significant destination and departure point.

"The year-on-year industrial production data for China highlights the recovery that the country has made - as production is already 4.4% higher than the same time last year," says John Meyer, Head of Research at SP Angel. "China's recovery, along with relentless stimulus implemented by the U.S. is bolstering commodity prices and driving shipping prices higher."

Image courtesy of Trading Economics

The undeniable recovery in the trade of raw materials as per the Baltic index is supportive for basic commodity producing countries such as Australia who earn significant amounts of foreign exchange through the export of goods such as iron ore, aluminium, coal and natural gas.

The importance of this sector to the country means the Australian Dollar is colloquially considered to be a commodity currency; and on the commodity front all signs remain supportive of a robust outlook even if the stock market continues to telegraph an erratic investor community torn between the recovery story and fears of secondary covid-19 infections.

Above: The Pound-to-Australian Dollar exchange rate is now lower than where it started 2020, and should commodity trade continue to improve, further losses could occur

Echoing the message from the Baltic Exchange are movements in key commodity prices, a critical component of Australian Dollar valuations.

Iron ore prices remain elevated courtesy of Brazil's struggles to contain the coronavirus outbreak, keeping the risk of mine disruptions elevated. Iron is Australia's main foreign currency earner and the hit to Brazilian production has gifted Aussie miners higher prices which should underpin the country's terms of trade which is a fundamental support for the currency.

Prices of iron ore are up 12% year to date according to Mysteel Global, "however many view a price over the $100/t as unsustainable," says Meyer, pointing at a potential paring back of the recent gains in iron, which could put a lid on Aussie Dollar performance.

Above: The Australian-U.S. Dollar exchange rate has recovered its 2020 losses, and whether or not it can break to fresh highs will likely depend on global commodity trade dynamics.

Coal is Australia's second largest export, and Chinese coking coal imports from Australia up 51% year-on-year according to Meyer.

"Coking coal imports from Australia stood at 2.07mt in May vs 1.37mt the year before, and 4.47mt in April, according to customs data. Australia has taken market share from other exporters such as Mongolia, who are only now gradually resuming shipments to China after suspending them in early Feb to avoid the spread of coronavirus," says Meyer

Further signs of the ongoing recovery for basic commodities is evident in copper dynamics where Chinese imports of refined copper increased 6.2% compared to April and 22.7% compared to May 2019, totalling 505,700 tonnes according to Chinese customs data.

Copper is significant in that investors tend to watch its performance when looking for turning points in the global economy, giving rise to the term "Doctor Copper".

"The rebound in the copper price, which hit multi-year lows when the coronavirus was at its peak in China, is now recovering due to the top consumer's rebound along with mounting supply concerns in South America," says Meyer.

The metal has surged 20% this quarter and climbed above $6,000/t last week for the first time since the COVID-19 outbreak became a global pandemic according to Bloomberg data.

Three-month copper contracts on the London Metals Exchange rose 0.6% this morning to $5,979/t according to Fastmarkets data.

On Monday, Shanghai copper prices hit their highest in more than five months according to Reuters data as traders feared a drop-in output in Chile due to a spike in COVID-19 infections.

So while stock markets appeared to lose some confidence in June - which put the brakes on the Aussie's gains against some major peers - the underlying story in global trade and commodity markets remains supportive of the currency given China's huge stimulus initiatives designed to help their economy recover from the slump suffered earlier in the year.