Iron Ore's Supply Side Ace Card Limits Australian Dollar's Losses

Australia's Dollar was a laggard among major currencies on Friday as risk-aversion prevailed among investors ahead of the weekend but the antipodean unit remains undervalued and robust prospects for the iron ore market have continued to limit the currency's downside potential. 

The Australian Dollar's outperformance in 2020 puts it on a strong footing at the start of the new year, but some analysts say investors must be aware that the exceptional performance of past months might not be repeated in 2021.

The Australian Dollar was a laggard and Sterling an outperformer on Wednesday as a stalling iron market conspired with the Bank of England (BoE)  to incite the Pound-Aussie rate into a fifth consecutive increase, but the British currency could eventually struggle to get past 1.80.

The Australian Dollar is still fundamentally undervalued even after its forty percent rally from March 2020 lows, according to analysts at Commonwealth Bank of Australia (CBA), who say that surging commodity prices are lifting model-derived estimates of the currency’s underlying worth.

The Pound is forecast to lose further ground to the Australian Dollar, with momentum studies of the charts confirming the Aussie Dollar is favoured over its British counterpart.

The Australian Dollar remained the second best performing major currency of 2021 on Friday but gains relative to the Euro have been less remarkable than against the Japanese Yen and Commonwealth Bank of Australia is now wagering on a catch-up that if successful, would push EUR/AUD to its lowest since 2017. 

The Aussie is likely to push the Pound-to-Australian Dollar exchange rate to a three-year low as it continues to outperform  in the weeks ahead, according to TD Securities, although analysts at Commerzbank have warned that further strength would risk prompting a Reserve Bank of Australia (RBA) complaint.

Foreign exchange strategists at HSBC have recommended buying the Australian Dollar on the expectation that further gains for the antipodean currency to gain exposure to the global economic recovery and rising commodity prices.