- AUD shows increased correlation to oil prices

- Oil price "has an important influence on AUD" says CBA

- Comes as Aus increases exports of natural gas

- But iron ore to remain a key commodity for AUD value

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The standard-bearer petro currencies of the G10 have long been the Canadian Dollar and Norway's Krone, which is understandable owing to the significant oil and natural gas production in these two countries.

But the recent growth in Australia's oil and gas industry means that the Australian Dollar might also need to be classed not just as a commodity currency - as has traditionally been the case - but more specifically as an oil currency, particularly given the currency's newfound relationship with Brent crude prices.

"Australian oil and gas production now exceeds iron ore production," says Joseph Capurso, Currency Strategist at Commonwealth Bank of Australia (CBA). "Changes in oil prices are better correlated with changes in AUD/USD than changes in the iron ore price."

The Australian Dollar is particularly exposed to Australia's terms of trade, i.e. the composition of the country's export and import baskets - and CBA says most of the fluctuations in the terms of trade is driven by commodity prices.

"A common tool for estimating the terms of trade, and partially valuing AUD/USD in real time, has been the iron ore price. The intuition behind the idea is that iron ore is Australia's largest export so its price has an important influence on AUD," says Capurso.

However, Capurso says "a changing of the guard of the drivers of the terms of trade and AUD has quietly occurred".

According to data, Australian oil and gas production has risen to the extend that it now slightly exceeds iron ore production in 2018/19.

"Australian gas production has surged in the past decade because of the build‑up in LNG capacity. The upshot is iron ore and gas prices are now both influential on AUD/USD," says Capurso.

The Australian Dollar has risen by 22% from a March 19 trough to reach a high of 0.7064 on June 10.

The gains correspond with a rally in Brent crude oil of 52% over a similar period and rise in natural gas prices of 13%.

"There is an interesting angle to the LNG price‑AUD/USD story. Australian LNG prices are a function of the Brent oil price. Specifically, the price of Australian natural gas exported to Japan is a five month lag of the Brent oil price. Therefore, fluctuations in the Brent oil price will affect the fundamental valuation of AUD/USD," says Capurso.

Capurso adds the spot LNG price is not a good indicator of the price received by Australia because most of Australia's LNG is sold on contract linked to the Brent oil price.

CBA say oil prices maintain a superior correlation with AUD versus the iron ore price across different frequencies (monthly, weekly and daily). But, while oil prices have become increasingly important to the value of the Australian Dollar, iron ore will remain a key driver and moves in both will impact on the value of the currency.

Concerning the outlook for these two commodities, CBA forecast Brent crude oil prices to be at $40 a barrel by year end. They however predict iron ore prices to come back down from $105 a tonne to $70 a tonne by year end.