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Commodities and Australian Dollar Set for a Boost on New Chinese Infrastructure Boom

- AUD rally extends
- China set to spell out stimulus plan
- Expect to see hefty infrastructure expenditure
- Should bode well for commodity demand
- Aussie Dollar to be a beneficiary

Chinese heavy industry

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  • GBP/AUD spot rate at time of writing: 1.8705
  • Bank transfer rates (indicative guide): 1.8050-1.8180
  • FX specialist rates (indicative guide): 1.8260-1.8540 >> more information

The Australian Dollar rally against the U.S. Dollar, Euro, Pound and other G10 currencies looks set to extend amidst expectations for an ongoing improvement in investor sentiment and demand for Australian commodity exports.

The Australian Dollar remains highly correlated with global stock markets, which are this week rallying on a combination of news of a potentially successful covid-19 vaccine and commitments from the Federal Reserve to support the economy further if needed.

The rally in stocks and 'risk on' commodities extended into Tuesday after Moderna's coronavirus vaccine - the first to be tested on humans - was reported to show great promise, with results suggesting it to be safe. Crucially, it succeeded in generating antibodies which stopped the virus replicating in the patients.

According to early trial results shared on Monday, eight healthy volunteers saw few adverse effects after taking two doses of the potential vaccine, while it appeared to trigger an immune response by producing "neutralising antibodies" in all patients.

The rally in 'risk on' assets means the Pound-to-Australian Dollar exchange rate is at 1.8709 meaning Sterling has now fallen in value for 25 of the past 31 days, confirming an entrenched short-term downtrend is in place.

Relentless trend in GBP to AUD

The Australian-to-U.S. Dollar exchange rate is meanwhile retaining a bullish tone at 0.6545, but is yet to break above the May highs at 0.6568. A break above here could potentially open the door to fresh multi-month highs.

Rising commodity prices are meanwhile a key driver underpinning the Aussie Dollar's run higher, as Australia's export basket is stacked with iron ore, coal, natural gas and other related commodities.

"AUD/USD continues to hold above important support at 0.6400 underpinned in part by higher commodity prices. Iron ore and crude oil prices are pushing higher. The acceleration in China’s crude steel output is positive for iron ore demand and helps explain some of the support for iron ore prices over the last few weeks," says Elias Haddad, FX Strategist at Commonwealth Bank of Australia.

Iron ore 62% spot prices (at Tianjin) were at US$90.5/t at the start of the week vs. US$87.6/t seen last week while Chinese steel rebar 25mm was at US$532.3/t vs. US$533.3/t last week. Crude steel came 2.83mt per day or 85.02mt for April, its highest level since last June.

Coking coal futures at the Dalian Exchange were seen at US$119.0/t at the start of the week vs US$117.0/t recorded last week, which is likely due to higher Chinese steel production.

Concerning the outlook, expectations for fresh Chinese economic stimulus measures to overcome the coronacrisis downturn are likely to underpin further gains in commodity prices and, by extension, the Australian Dollar.

John Meyer, an analyst at brokerage SP Angel says China's NPC (National People’s Congress) meets this week to determine the shape of China’s recovery plan. He says the NPC is likely to decide on the form and cost of stimulus to be used to restore growth to China’s economy.

"Steel producers are watching carefully to see if China will resurrect its policy for significant national infrastructure spend," says Meyer. "One of the key drivers for the past 20 years of phenomenal Chinese economic growth was the need to reconstruct Chinese society to move the population into new cities away from historically impoverished villages to improve the health of the nation."

Meyer adds that China is likely to ramp up its drive to improve healthcare services and to ensure infrastructure is better suited to operating in an emergency.

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"This may come in the form of new regulations for social distancing in factories, trains, busses and other infrastructure, eg more space for less people," says Meyer. "COVID-19 is just one of many deadly viruses which have developed in China in the last 30 years. Chinese politicians will almost certainly rule on how to contain the current crisis and better manage the next one."

China has successfully transformed its economy through construction of substantial infrastructure, and Meyer suspects it will use this drive to build new factories, housing and transport infrastructure to better manage virus outbreaks.

This bodes well for demand for Australian exports, and can only be an evolving fundamental positive for the Australian Dollar's outlook as a result.

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