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Australian Dollar Outperforms on the Day Sydney Reopens

- Sydney reopens
- "oversold" AUD moves higher
- Supported by coal, gas prices
- RBA rate hike now priced for 2022

Sydney reopens

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The Australian Dollar is the top performing major currency at the start of the new week, a performance the coincides with expanded freedoms in Sydney, with further upside being predicted by some foreign exchange analysts.

"AUD is outperforming most major currencies," says Elias Haddad, Senior Currency Strategist at Commonwealth Bank of Australia.

The reopening of Sydney and other regions of New South Wales was long expected by the foreign exchange market and is therefore 'in the price' of the currency, but the Australian Dollar's outperformance nevertheless reflects a cheerier sentiment on the domestic economy.

Client-facing businesses in Sydney opened their doors to fully vaccinated customers on Monday after nearly four months of lockdown, a development that economists anticipate will propel economic growth back into positive territory.

This boost will be accelerated later in the month when the state of Victoria opens up in a similar manner.

Australian Dollar leads the pack

Above: AUD is the best performer on Oct. 11.

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The Australian-to-U.S. Dollar exchange rate (AUD/USD) is at 0.7335, up 0.40% on the day.

The Pound-to-Australian Dollar exchange rate (GBP/AUD) is meanwhile at 1.8563, down half a percent on the day.

But Haddad says rising global energy and base metal prices are playing a more supportive role for the Aussie Dollar at the start of the new week.

The world's two major coal consumers of China and India are desperately short on thermal coal, something of which Australia has in abundance.

Reuters reports China's Liaoning province has warned it may see a 4.74GW shortfall in power this week despite efforts to import more coal to raise power supply.

Heavy rain has also closed around 60 Chinese coal mines with rail lines also closed due to flooding.

Meanwhile, over half of India’s 135 coal-fired power plants, supplying 70% of the country’s electricity, are said to have coal supplies of less than 3 days.

The net effect is a surge in the price commanded by Australia's benchmark Newcastle coal:

Newcastle coal benchmark

Above: ICE NewCastle Coal Nov '21, chart courtesy of BarChart.

Furthermore, both Asia and Europe are caught in an intense bidding war for natural gas, pushing record prices.

Given Australia's number two and three exports are coal and natural gas, the country naturally stands to benefit.

Indeed, Australia reported a record trade surplus in August as demand for coal and gas surged and further gains will have been recorded in September and October as prices for coal and gas headed yet higher.

In response to the surging trade surplus currency strategists at Westpac said the fair valuation of the Australian Dollar had risen accordingly.

Australian trade balance

Above: Australia's trade surplus, image courtesy of the ABS.

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Another leg of Australian Dollar outperformance is the growing expectation that interest rates at the RBA will rise as soon as 2022.

"Australian interest rate futures continue to bring forward bets on rate hikes despite the RBA’s guidance that it will not raise the cash rate (currently at 0.10%) before 2024," says Haddad.

Australia's OIS curve implies a cash rate of 0.25% by end-2022, 0.90% by end-2023 and 1.40% by end-2024.

For their part, the RBA has been firm in saying interest rate rises are not likely until 2024, suggesting a significant disconnect between RBA guidance and the market's belief.

Helping this expectation along is the reopening of Australia's most economically important state of New South Wales on Monday.

Client-facing businesses opened their doors to fully vaccinated customers on Monday after nearly four months of lockdown, a development that economists anticipate will propel economic growth back into positive territory.

This boost will be accelerated later in the month when the state of Victoria opens up in a similar manner.

Positioning appears to be another supportive factor behind the Aussie Dollar's outperformance: bets against the Australian Dollar have been one of the most popular amongst foreign exchange market participants over recent months.

Aussie Dollar positioning

Extended positioning - as is the case with the Australian Dollar in the above chart - is that it can often become unto itself a headwind.

When positioning becomes extended the prospect of a reversal grows and such moves can prove to be quite sharp.

In the context of the Australian Dollar closing out those bets for downside inevitably require Australian Dollars to be bought to settle the relevant contracts.

Strategists at Crédit Agricole say one of their models is now recommending to buy Australian Dollar's, indicating the potential for +3.0% upside in the AUD/USD.

"The AUD remains the most oversold G10 currency at present and the positioning has changed little over the past week," says Valentin Marinov, Head of G10 FX Strategy at Crédit Agricole.

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