The Australian dollar has been on the charge over the past month, rallying by over 5% against the US dollar.
The AUD/USD briefly traded above 79 cents earlier today, the highest level that it’s ventured since late September.
So what’s been driving this sudden and spectacular revival, seeing it lift from 75 cents to 79 cents in little over a month?
To the National Australia Bank (NAB), almost all of the strength has been due to one single factor: stronger commodity prices.
“Since December 8, the rise in our fair value estimate… is almost entirely explained by the rise in commodity prices with base metals, gold and oil leading the way,” says Ray Attrill, Head of FX Strategy at the NAB.
“The broadening of the global growth recovery, evident in the healthy December PMI readings across the globe, has undoubtedly been a factor supporting commodities with China’s readings in particular surprising on the upside despite concerns for a potential pullback.
“China’s environmental initiatives have also played a role, lifting demand for higher grade imported coal and iron ore, further enhancing the AUD uplift from commodities.”
Alongside the boost the Aussie has received from firmer commodity prices, Attrill says that a “loss of positive USD momentum since early November, a further lift in already buoyant risk sentiment and some chunky M&A announcements, have all played a part in supporting the AUD”.
Over the near term, Attrill says the momentum the Aussie has enjoyed over the past month will likely continue, suggesting that it “has room to trade higher and even spend some time back above 80 cents”.
However, he thinks the tailwinds for the Aussie are unlikely to last longer-term.
“We think the main forces that have driven the AUD to close to 79 cents — USD weakness, strong commodity prices, probable M&A flows and super-strong risk sentiment, are unlikely to persist over the course of 2018. And as we saw last September, when one of these factors turns against the AUD, others often do at the same time.”
As such, Attrill says the AUD/USD is still likely fall back into the 70-75 cent region in 2018, although he admits that it may take longer than his earlier forecast for the first quarter of the year.