Iron is Australia's top export, its price matters for AUD. Image (C) Adobe Stock

The Aussie Dollar is looking soft heading into the weekend owing to a slide in global metal prices.

Iron ore is Australia's largest export and therefore the country's major foreign currency earner; what happens to metals prices therefore impact on the potential capital inflows likely to come into the country which in turn lends support to the currency.

"Metal prices fell yesterday and AUD collapsed," says analyst Marshall Gittler at ACLS Global. "It’s not clear to me though why metal prices fell; it may just have been trader fatigue and some profit-taking after the recent surge. There doesn’t seem to be any change in the Russian sanctions to warrant the change in direction."

The Bloomberg industrial metals spot index was off 1.3% and the Australian Dollar suffered some heavy selling against the US Dollar in response. AUD/USD was as high as 0.7781 this week but is now quoted down at 0.7707 ensuring a downtrend in place since early February remains intact.

The Pound-to-Australian Dollar exchange rate meanwhile remains supported at 1.8237, this despite the broad-based sell-off being suffered by Pound Sterling. The Aussie should be doing a lot better here and pushing GBP/AUD down to multi-week lows.

Despite the Aussie Dollar's ongoing weakness, Gittler is optimistic on the outlook saying, "I’m not convinced that the uptrend in metal prices has ended, in which case this may be a good opportunity to go long AUD."

However, if we look at the chart for iron ore, we can see the AUD/USD's fall since February does broadly correlate with a decline in ore prices:

I don't know iron market dynamics well enough to suggest a turn in fortunes is likely to happen anytime soon and would therefore respect the trend evident in the charts.

"Is that it for the AUD? We wouldn’t count on it just yet," asks Neil Mellor, Senior Currency Strategist, BNY Mellon.

Mellor notes the Aussie Dollar, via its deep connections to China - the principal driver of global demand for the very produce in which Australia specialises – is arguably something of a proxy for prevailing risk appetite.

"And certainly, the forces weighing upon risks appetites are fairly considerable," acknowledges Mellor.

But, Mellor argues "at the very least, the remarkable resilience of risk appetites and the AUD itself warrants some caution in presuming that the bears are now in full control. The fat tails may continue to be shouldered."

Analyst Elias Haddad with CBA in Sydney is however of the opinion that the currency's weakness is a function of US dollar strength more than anything else, but he too is not convinced we are witnessing the start of a major bout of weakness.

"AUD/USD drifted lower towards 0.7720 largely because of broad USD strength. Positive domestic and external economic growth prospects as well as Australia’s favourable balance of payments backdrop will limit AUD/USD downside. There are no policy relevant Australian economic data today so AUD/USD will be guided by the trend in USD and financial market sentiment," says Haddad.

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