AUDUSD the superstar of G10 FX

Iron ore futures have rallied 25% in the past 5 days, while coal prices are on a tear too, putting on 36% since late January. The commodity space is super-hot and it’s one big momentum trade, driven by a clear fundamental catalyst. It probably shouldn’t surprise that the AUD is therefore the superstar currency over the past month and while we know the Aussie can default to being a risk proxy and moving closely with S&P 500 futures, at this moment it is an out-and-out commodity play.

Aus v US terms of trade

(Source: Bloomberg - Past performance is not indicative of future performance.)
If we look at relative terms of trade (above - AUD vs the US) it’s not hard to see why the world has piled into AUD longs. Let’s not forget that if we look at the weekly CFTC CoT report we see leveraged funds and asset managers were, and still are, net short – they would be covering those positions now, and maybe they had been holding shorts as a hedge against equity weakness, but that is the wrong trade right now and the best expression of a bearish equity trend is short SEKJPY. Incredibly the RBA are still the most patient central bank in G10 circles and it wouldn't be hard to believe AUD wouldn’t be 5%+ stronger if the RBA had moved to market pricing and offered a strong green light of a hiking cycle. We can look at the bond market and see both Aussie real and nominal bond yields are moving higher relative to US yields, at least in 5yr maturities and beyond – this incentives capital to flow to Aussie investments, with Australia looking like a relatively attractive investment destination. It's not just AUDUSD – the easier money has been made shorting EURAUD, as Europe is clearly most affected by the geopolitical tensions and the sanctions placed on Russia – the market is talking stagflation risks in Europe as EU Nat Gas prices spike 200% in the past 11 sessions, pushing EU inflation expectations 2%. The hardest part in trading a cross like this is not entering but holding and extracting as much out of the trade as you can – rules-based trading can be clearly advantageous. GBPAUD is through 1.82 and eyeing the Nov swing low of 1.8126 and even risk proxies such as AUDJPY is now the highest level since 4 November. For those like a slower pace of movement, AUDNZD is pushing the top of the range at 1.0800 and a break here would target 1.0944.

(Source: TradingView - Past performance is not indicative of future performance.)

EURAUD is the big trade though and while I can look and see price is now 4.2% discount to its 50-day MA – typically a factor that leads to mean reversion - these are obviously exceptional times. Until the market feels there is a circuit breaker – likely in the form of de-escalation – then the AUD and commodities will be subject to positioning moves and flow, but pullbacks will be bought.