Australian Dollar Surges on Gold’s Record High and Rising Commodity Prices

The AUD/USD exchange rate is closely tied to Australia’s position as a leading exporter of key commodities such as iron ore, coal, and gold. As commodity prices rise, Australia experiences increased export revenues and improved economic growth, strengthening the Australian dollar against the U.S. dollar. This dynamic not only reflects the robust nature of Australia’s commodity-driven economy but also highlights how global market conditions and investor sentiment can drive significant fluctuations in the AUD/USD pair. This article discusses the recent market developments that could impact the AUD/USD in the short, medium, and long term.

Navigating Economic Uncertainties in the AUD/USD Pair

The monthly chart below highlights the significant movements of the AUD/USD pair over the past two decades, emphasizing the economic uncertainties that have impacted the pair’s price dynamics. Notably, the AUD/USD experienced a significant downward drop during the 2008 financial crisis, coinciding with a decline in the commodity market. However, as the commodity market recovered post-crisis, the AUD/USD rebounded strongly.

Similarly, the decline in commodity prices and the slowdown in the Chinese economy from 2014 to 2016 led to a further drop in the AUD/USD pair. The COVID-19 shock also impacted global markets, dropping the AUD/USD. Yet, as the commodity market recovered after the initial shock of COVID-19, the AUD/USD pair surged significantly higher.

The market is forming a falling wedge pattern from the February 2021 highs of $0.801. This falling wedge is a bullish pattern, indicating that the pair may be poised to form bullish price action within this consolidation. The August 2024 rally is approaching the falling wedge line, suggesting that a breakout from this line could trigger a strong surge in the pair and boost AUD/USD prices.

This is particularly relevant as 2024 is marked by significant geopolitical crises, spreading from the Middle East to the globe, positively impacting the commodity markets. The shock to the commodities market due to these geopolitical crises may positively influence the AUD/USD pair.

As per the Australian Government Department of industry, Science and Resource data, the near-term outlook for Australian resource and energy commodity exports has shown slight improvement, signaling potential strength for the AUD. As major economies experience a modest uptick in economic activity, the prospect of improved global growth in 2025, driven by easing monetary policies in Western economies, further supports this positive outlook.

Although Australia’s resource and energy exports are forecasted to decline from $466 billion in 2022-23 to $417 billion in 2023-24 and even lower in the following years, the stabilization of key commodity prices like iron ore and the recovery of nickel and lithium prices suggest a bottoming out of the declines. With gold reaching a new record high and supportive measures from the Chinese government, the conditions are ripe for a rebound in Australia’s export-driven economy. As the AUD/USD is expected to lift, this combination of factors points to a resilient Australian dollar in the face of global challenges.

Recent Market Development

The recent news surrounding the AUD suggests a potential continuation of its winning streak against USD. The release of the Reserve Bank of Australia’s (RBA) August meeting minutes, which indicated a steady cash rate for an extended period, has supported the AUD. The RBA’s decision to maintain the rate reflects a careful approach to balancing economic risks, which has been well-received by the market. This cautious optimism around the RBA’s policies will likely strengthen the AUD further, especially as investors interpret the central bank’s stance as supportive of the Australian economy’s current growth trajectory.

Moreover, the AUD’s position is also influenced by external factors, particularly developments in China, Australia’s largest trading partner. The People’s Bank of China (PBoC) kept its Loan Prime Rates (LPRs) unchanged, signaling stability in the Chinese economy. As Australia’s economy is closely tied to China’s due to their strong trade relationship, any positive signals from China tend to boost the AUD. The PBoC’s decision not to alter rates reassures markets that China’s economic policy remains supportive, indirectly benefiting the Australian Dollar. Therefore, the stable outlook in China and the RBA’s decision may result in continued upward pressure on the AUD/USD pair.

On the other hand, the U.S. Dollar is facing downward pressure due to recent comments from Federal Reserve officials that hint at potential rate cuts in the near future. This dovish tone from the Fed contrasts with the hawkish sentiment from the RBA, further widening the interest rate differential in favor of the AUD.

As a result, investors may find the AUD more attractive, leading to increased demand and further appreciation of the AUD/USD pair. Additionally, the markets will closely watch upcoming data releases and Fed Chair Jerome Powell’s speech at Jackson Hole, as any confirmation of a softer U.S. monetary policy could further weaken the USD and bolster the AUD.

From a technical perspective, the USD index attempts to break down from the strong support level of a triangle pattern, which could initiate a significant drop in the U.S. dollar and boost the AUD/USD pair. However, this is a strong support region, and the USD index must close below this red line on a weekly basis to confirm the breakdown.

Stabilizing Trends in the AUD/USD Market

As discussed above, the AUD/USD outlook appears bullish, driven by a stronger AUD and a weaker USD, and the ongoing geopolitical crisis is bolstering the commodities market. This stabilization process is also evident in the weekly chart for AUD/USD, as shown below. The red trend line in the chart is curving, indicating a bottom formation.

Additionally, the quick reversals from each bottom toward this curved line suggest the price stabilizes at current levels. The recent bottom at $0.6348 two weeks ago, followed by a strong reversal, has formed a bullish hammer pattern. This indicates that prices are poised to surge. A breakout above $0.6799 is needed for the pair to initiate a strong rally.

The short-term chart below supports this outlook, but the price is currently overbought at $0.67390 and may be corrected. However, the recent bullish trend is not over based on the weekly and daily chart analysis. Therefore, any price correction from this resistance level should be considered a buying opportunity for investors. As the geopolitical crisis intensifies, it will likely benefit the AUD/USD.

Final Thoughts

The 2024 geopolitical crisis is expected to benefit the AUD/USD pair due to its positive impact on commodity prices, a significant driver of the Australian economy. As global tensions rise, particularly in regions affecting energy and raw materials, commodity prices often surge due to supply concerns and increased demand for safer assets like gold and other Australian exports.

This dynamic strengthens the Australian dollar, making it more attractive to investors. Additionally, the crisis may lead to a flight to safety from riskier assets, which paradoxically could bolster the AUD if Australia’s economy remains stable and its central bank maintains a hawkish stance. These factors could drive the AUD/USD pair higher as 2024 progresses.

Moreover, the Reserve Bank of Australia’s steady monetary policy and potential weaknesses in the U.S. dollar contributed to a favourable outlook for the AUD. Technical indicators also suggest a strong foundation for further gains, with the formation of bullish patterns and key support levels holding firm. As global markets react to these developments, the AUD/USD pair will likely see significant upward momentum, making it an attractive option for investors looking to capitalize on these dynamics in 2024. Investors can buy AUD/USD on any price dips.