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Commodities to Battle Air Strikes and Trade War for Influence on Australian Dollar

 

The Australian dollar, together with other risk currencies, will likely start next week under pressure following the launch on Saturday morning of air strikes on Syrian weapons research and storage targets by the US, UK and France.

The strikes come after a chemical weapons attack in Douma one week ago, which killed an estimated 75 people. The forces of Syrian President Bashar al-Assad have been deemed by Western powers to be responsible for the attack, and as such, Syria is said to have contravened the Chemical Weapons Convention – a 192-country treaty to which Syria acceded in 2013 that bars the use of chemical weapons.

In response to the strikes, Russia, which has troops on the ground in Syria in support of the Assad regime, threatened “consequences.”

Geopolitical tensions of this type usually add weight to the Australian dollar and support safe havens like the Japanese yen, gold and government bonds.

Last week was a good one for the Australian dollar – it gained for the first week in five against the US dollar and for the second consecutive week against the euro – but the week was marred somewhat by a sharp reversal late on Friday.

The “Aussie” was on course to end the week well following the release of the RBA’s Financial Stability Review, in which reduced concerns over household debt and broader financial stresses were evident, and as oil made progress towards a three-year high, but the currency weakened in eight of the week’s ten final trading hours to give back all of Friday’s gains and settle at 0.777 US dollars and 0.629 euros, close to eight-week averages. The late reversal was indicative of end-of-week profit-taking and speculation over a military intervention in Syria.

Over the medium term, the commodities-sensitive Australian dollar is likely to receive support from the likes of oil, iron ore and copper, which will continue to rally, per last week’s commodities update from investment giant PIMCO.

In arguing for increased allocations for commodities in investor portfolios, PIMCO’s Mihir Worah says:

“We are transitioning from an environment where deflation posed a significant risk and rising inflation was good for markets, to one where low and stable inflation is preferable. In such an environment, commodities shine.”

Commodities will of course suffer should global economic activity be disrupted by a US-China trade war. Trade tensions were eased, however, when at the Boao Forum on Tuesday, Chinese President Xi Jinping had no harsh words for Washington and instead vowed to ease tariffs and further open China’s economy and markets.

 

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