The Australian dollar (AUD) is one of the strongest G10 currencies today, which has to do with several factors:
- A likely budget surplus in fiscal 2022/2023 and the government's conservative approach to spending
- Rising commodity prices, particularly copper, and continued high iron ore prices
- Better economic situation in China and no increase in political tensions with the United States
- The U.S. dollar is in retreat due to the expectation of an end to the cycle of interest rate hikes in the U.S.
Surplus in Australia
As Bloomberg points out, the latest budget update, which will be released on Tuesday, will most likely show a surplus in fiscal 2022/2023, although subsequent years will most likely see a return to a deficit. This is due to rising revenues, including from high commodity prices. On the other hand, the budget is not expected to change its conservative approach to commodity price forecasts, which could lead to a positive surprise later on. At the same time, the conservative approach to forecasting commodity prices (expectation of decline and stabilization) means that spending will not be increased excessively.
There are many indications of a positive revision of Australia's planned stimulus. The surplus may support further strengthening of the AUD, particularly as China and commodity prices may still surprise further positively. Source: Bloomberg
Unexpected interest rate hike
The RBA recently surprised and decided to raise interest rates to 6.85% (it made a 25bp hike) on Wednesday last week. At the same time, however, the budget is expected to adopt a lower expected interest rate path, which is expected to lower the expected cost of servicing debt.
Commodity prices rise
Today trading for some metals are suspended on LSE (the London Commodity Exchange is out of action after the coronation of King Charles yesterday). Nevertheless, we are seeing a general rise in commodity prices on Chicago Mercantile Exchange (CME), which is supporting commodity currencies (we are also seeing NZD and CAD rise).
The interest rate hike in Australia, the rise in commodity prices and the expected budget surplus, not to mention the possible further recovery in China, are all factors that have been motivating the AUD recent rise. If resistance at the 38.2 retracement is broken, the pair should move towards the 50% retracement and the 0.6900 level. Source: xStation5
