Australian Dollar: Industrial Metals Are Why BofA is Buying

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The Australian Dollar is the preferred commodity currency with strategists at Bank of America (BofA) who say industrial metal market dynamics are proving supportive.

The bank says it likes to be long AUD/CAD as it issues fresh research into the G10 commodity currencies of Canada, Australia and New Zealand, finding Australia's Dollar to be the top pick.

"The correlation between industrial metals and the AUD has strengthened," says Adarsh Sinha, an FX Strategist at BofA's Merrill Lynch unit in Hong Kong.

BofA's research finds the correlation between industrial metals returns and the AUD has strengthened markedly since mid-2022.

"Over the same period, CAD and NZD returns have exhibited a weaker correlation to the returns on energy and agriculture price indexes," explains Sinha.

The Canadian Dollar is considered a commodity currency thanks to its historical linkages with Canadian oil exports, while New Zealand has a strong agricultural export base.

"In our view, markets are more likely to look through commodity price movements primary led by supply-side fluctuations than shifts in demand profile for commodities. The surprisingly robust demand profile for industrial metals since 2022 has supported the AUD," says Sinha.

He explains industrial metals have been supported by strong global demand: "China's iron ore imports rose by 6.6% in 2023 in volume terms despite a nationwide property slump. Resilient Chinese demand was partly a function of increasing exports of steel products last year, and partly by growing demand in non-property steel demand (e.g., auto and infrastructure)".

Iron ore prices have nevertheless come off their highs, but Sinha explains this sell-off comes against a backdrop of rebounding demand for other industrial metals like copper.

From a tactical point of view, BofA likes to be long AUD/CAD, judging that AUD/NZD looks extended after rising to six-month highs.