📈 Commodities and AUD - Westpac

• AUD has serially failed to match the advance in commodity prices, it’s not just a 2021 story. AUD has not kept pace with commodities going back as far as 2016. The then strong USD and fading interest rate interest rate support were the prime culprits from 2016- 2019. We wonder whether weak long term direct investment dynamics could be another background factor, a trend that is continuing to this day.

• Supportive long term direct investment flows into AUD have been notably absent for several years. Both mining investment and foreign direct investment as a share of GDP are hovering near multi year lows. That makes this commodity price surge very different from the 2012-2014 period, when a dramatic LNG-driven mining investment boom and linked to that, strong long term direct investment inflows into Australia, underpinned AUD. Back then, mining investment as a share of GDP doubled over several years, to 6%, while net direct investment flows rose from 1% of GDP to more than 4% of GDP.

• But is this state of affairs about to change? The price signal is in place for a material lift in mining investment in the coming year and linked to that, long term direct investment flows. Sustained trade above USD0.80 for AUD may be just a matter of time.