The Australian Dollar Falls to Fresh 8-Month Low Against the Pound as Commodity Price Concerns Continue to Weigh

The British Pound to Australian Dollar exchange rate (GBP/AUD) reached a high of 1.7392 on Thursday, May 4. The last time this level was attained was back in September 19, 2016.

The Australian Dollar has been under pressure against the Pound since March and momentum continues to suggest further declines are likely.

And, one of the key drivers of Australian Dollar value - commodity prices - continue to point in the wrong direction.

At the time of writing commodity prices on Chinese exchanges show iron ore to be down 7%, rubber 5.5% and palm oil 1.2%.

Iron ore is Australia’s largest export and foreign exchange earner and therefore falling prices in the commodity matter for the future inflows of foreign exchange into the country.

“The Australian Dollar weakened, weighed down by US Dollar strength and was also dragged down by weaker commodity prices. AUD fell to its lowest in around four months and is currently trading at around 74.2 US cents,” says Janu Chan, Senior Economist at St. George Bank in Sydney.

The latest RBA commodity price index appears to have peaked in the near term, as the index slipped 3.1% on a month-on-month basis in USD terms in April.

But is still up 33.8% on an annualised basis.

“With growth conditions appearing broadly resilient in China and a cyclical recovery gaining steam in the rest of Emerging Asia, we expect export demand, especially for commodities, to remain buoyant in volume terms,” says Rahul Bajoria at Barclays Bank in Singapore.

Note the reference to volumes of exports as opposed to the price of those exports.  

The picture is not dismal, but neither is it positive enough to stop the Australian Dollar bleed further value to other global currencies that might be more attractively valued, for example the Pound.

But Trade Balance Data Remains Robust

The Australian Dollar did however see losses contained by the release of official trade data released by the Australian Bureau of Statistics on May 4.

The ABS reported the country's trade surplus came in at AUD3.11bn in March, down from a revised AUD3.66bn for February.

Metal ores and minerals accounted for AUD358m, an increase of 4% on February.

For the first-quarter of 2017 the surplus totalled AUD9bn which is the largest ever recorded.

This means that the fundamental underpinning of the Australian Dollar remains robust - exports are earning foreign currency and keeping the Aussie bid.

Total exports rose 2% on a monthly basis and by 29.2% on an annualised baisis.

Total imports rose more by 5% on a monthly basis and were up 7.3% on an annualised basis, “indicating some improvement in domestic demand,” says Bajoria.

Barclays forecast the Reserve Bank of Australia to raise interest rates, but only in the second-quarter of 2018.

Such a move would be positive for the Australian Dollar which also benefits from  foreign capital inflows as investors seek to benefit from Australia’s higher interest rates.

Should these rates start moving higher again then we would expect such demand to be potentially reignited.

However, this is still some way off so for now the concern of the future trajectory of iron ore and commodity prices will be key.

"Sizeable surpluses seem unlikely in coming months given that commodity prices have retreated from their highs. We will also likely see some temporary impact from the recent Cyclone Debbie on coking coal export volumes. That said, prices remain well above their recent lows in early 2016, and volumes should continue to be strong over the course of the year," says Chan.