AUD resilience catches analysts by surpriseAmidst investor anxietiesHeld aloft by commodity price risesAnd expectations for RBA rate hikes

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The Australian Dollar is proving an outperformer amidst the Russian invasion of Ukraine, thanks to Australia's geographical distance, commodity exposure and expectations for a series of Reserve Bank of Australia rate hikes.

The Australian dollar has advanced 0.40% against the Dollar in the week Russia invaded Ukraine and triggered a massive sell-off in global stock markets.

Typically falling stock markets imply investor fear, creating the global backdrop that traditionally erodes value in the Australian currency.

AUD/USD is at 0.7198 at the time of writing and looks set to complete a fourth consecutive weekly gain.

"AUD FX has held up well despite global risk off and geopolitical concerns - terms of trade are supportive due to higher iron ore and energy prices," says Tony Morriss at Bank of America.

The Pound to Australian Dollar exchange rate (GBP/AUD) has meanwhile fallen for six days in succession and is down 1.80% this week at 1.8581.

"The resilience of AUD FX to deteriorating global risk-sentiment over the past month and even heightened geopolitical uncertainty this week is notable," says Morriss.

Above: In the week Russia invaded Ukraine it was the Australian Dollar that defied expectations to top the G10 performance board.

GBP to AUD reference rates at publication:

Spot: 1.8605High street bank rates (indicative band): 1.7950-1.8080Payment specialist rates (indicative band): 1.8472-1.8509Find out about specialist rates, hereSet up an exchange rate alert, hereSurging natural gas prices followed the commencement of a full-scale invasion of Ukraine on February 24, boosts the value of Australia's third most important export commodity and supports the country's terms of trade.

"Australia is a net energy exporter - liquefied natural gas exports are expected to reach AUD63bn this year," says Morriss.

But gold prices have also shot higher as investors seek out the one true safe haven asset, boosting the value of Australia's fourth most significant commodity export.

"Gold has rallied 7% from the start of the year and therefore has acted as an effective geopolitical hedge against the Russia-Ukraine conflict. While the rally has been swift, we think that it could have a lot further to go," says analyst Jeffrey Currie at Goldman Sachs.

Pound Sterling Live reported ahead of the Russian invasion that any sanctions on Russia could boost Australia's export earnings potential on the basis Australia also produces and exports similar commodities to Russia.

A pivot from Russian to Australian exports was therefore seen as a beneficial dynamic for the Australian Dollar.

Granted, sanctions from the West have not yet targeted Russian commodity exports but supply disruptions caused by the war are nevertheless occurring.

"The closure of Ukrainian ports and rail flows is reducing agriculture and metal exports," says Currie.

This, combined by investor demand for commodities as a hedge, are boosting commodity prices and are therefore ultimately favourable for the Aussie Dollar.

"Recent developments have been supportive for Australia's key commodity prices," says Morriss.

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Rising global inflation is also likely to encourage the ongoing pro-AUD shift in stance at the Reserve Bank of Australia (RBA).

Since the onset of the Covid crisis the RBA has been determined to maintain a soft and stimulatory stance via maintaining low interest rates, saying that wages would need to pick up to at least 3.0% before rate hikes could be considered.

This stance was on net a headwind to Aussie Dollar valuations.

But the RBA can ill afford to ignore booming domestic and global inflation and could well be required to act soon.

Indeed, the central bank has already ended quantitative easing Governor Philip Lowe said higher rates in 2022 is now a "plausible scenario".

The market's pivot towards more aggressive rate hike expectations have provided a natural source of support to the Australian Dollar.

Bank of America tell clients they are wary of the "risk is for a surprise hawkish pivot from the RBA sooner than we currently expect".

The bank forecasts AUD/USD at 0.72 by the end of the first quarter.