📝AUD’s Break With Commodity Prices Might Be Permanent: NAB Strategy

The relationship between commodity prices and the US terms of trade, to which the USD has for the most part been positively correlated for decades, has increasingly been driven by oil since the onset of the US shale oil revolution. US commodity exports – dominated by oil now command a more than 20% share of the US export basket.As a result, commodity prices, which have traditionally been negatively correlated with the US terms of trade and hence the USD, have become positively associated.

As a result, non-US commodity importing nations will face greater own-currency commodity price volatility than in the past, since the ‘hedge’ of a weaker USD when commodity prices rise, no longer exists. For non-US commodity exporters such as Australia, if their currencies appreciate less during commodity booms because of USD strength, the exchange rate will be less of a shock absorber than in the past (potentially requiring more active macro-economic stabilisation policies).

For AUD/USD, if the reduced significance of terms of trade volatility - already evident since 2021 - is permanently diminished, FX views will inevitably have to attach more weight to non-commodity prices drivers. In this regard, AUD (and EM currencies) are more sensitive to risk sentiment (VIX in this case) than other currencies, affirming the need for a sustained improvement in risk sentiment as one key precondition for a stronger AUD/USD - NAB Strategy