Commodity currencies have been active over the last couple of days, with a particular focus on the Australian dollar. The activity comes ahead of a key data release happening on Saturday, while the markets are closed. There is a particularly high level of risk going into the weekend with Chinese trade data and a pending agreement on the Strait of Hormuz on the docket.
Earlier in the week, markets were surprised when Australian trade data came in negative for the first time in nine years. It wasn’t entirely unexpected given the energy crisis, but on the heels of an unexpectedly hawkish RBA rate hike, it is particularly noteworthy. The data included an unusually large number of data processing imports, and it’s unclear whether that was a one-off or the start of a new trend.
China Stimulus Back on the Table
Either way, AUD strength relies on a positive trade balance that sustains demand for the currency, primarily through commodity exports to China. The situation in the Middle East particularly impacts Australia, a large petroleum producer with insufficient refining capacity. The country has to export oil in order to have it refined for domestic consumption, a situation that weakens the currency. It’s also a situation that the US is dealing with, and one of the reasons the greenback can’t capitalise as much on the high oil price.
China is less affected despite its high level of oil imports from the Persian Gulf, as it has been able to increase imports from Russia in the meantime. Industrial production in China continues at the same pace as before the war, which presumably supports commodity imports. However, domestic Chinese consumption has been propped up with stimulus from the central government. As the situation in the Middle East normalises amid higher energy prices, the central government could renew economic support measures that could bolster the Aussie.
The Nacho Trade and Oil Normalisation
Speaking of oil normalisation, financial commentators coined a new acronym to describe the situation: “Not a chance Hormuz opens,” or “Nacho” trade. It comes after the US paused efforts to force open the Strait with naval support and delays in reaching a deal to end the war with Iran. Markets are starting to price in a situation where the war doesn’t heat up substantially, but the Strait doesn’t reopen. This leaves oil prices high, which is beneficial for some commodity currencies like the CAD, but could weigh on the AUD.
The NZD is also gaining this week after RBNZ Governor Anna Bremen changed her tune on inflation. Initially, she said the RBNZ would “look through” inflationary impacts of the energy crisis amid a weak economy. Now that the war is dragging on, she warned earlier this week about the risk of rising inflation, raising expectations that the RBNZ might have to raise rates, as the RBA already has.
China Trade, Market Reaction
On Saturday, China will publish its trade balance, which is expected to decompress a bit last year, but still be affected by the energy situation. China’s trade surplus is anticipated to rise to $83.3 billion from $51.1 billion a month earlier. This is largely thanks to a 15.2% expected increase in imports. However, exports are also expected to rebound, with growth of 7.9%.
A recovery in China’s trade surplus, aided by strong exports, would help reassure investors that the AUD will be supported by trade winds. On the other hand, if China’s trade faltered, it could weigh on commodity currencies in general.
