Equity markets and commodity prices have staged an impressive rally since the start of February and the Australian dollar (AUD) has gained as much as 10% against the US dollar (USD).
It's a dramatic turnaround from the start of the year when shares, the Aussie dollar and commodities were plummeting.
The Commonwealth Bank USD Commodity Price Index is up 21% since the start of 2016 with major restocking in China’s steel industry driving iron ore prices to above US$70 a dry metric tonne for the first time since early 2015.
Iron ore is Australia's biggest export commodity and some of the top miners include Australian Securities Exchange (ASX) listed companies BHP Billiton (ASX: BHP), Rio Tinto (ASX: RIO) and Fortescue Metals Group (ASX: FMG).
BHP is up as much as 48% from its low this year, Rio Tinto is up 44% and Fortescue's share price has gained 153% in value.
Oil prices are another bellwether that appeared to be weighing on global sentiment, sinking to 12-year lows under US$30 in January. But benchmark Brent crude oil is trading back above US$40 a barrel.
The S&P/ASX200 is up 4.5% for the month so far, having risen 4.1% in March. It’s a more positive scenario than the beginning of the year when markets around the world had their worst start since 2009.
The Australian market dropped 5.5% along with markets in the US and China’s stock market was down more than 20% after the first month of 2016. By the end of February the ASX200 was down 7.8%.
The recent reduction in financial market stress appears largely the result of money markets pushing back the timing for the next US Federal Reserve interest rate hike.
The Fed raised rates in December for the first time in a decade and initial expectations of four increases this year have been revised down to the possibility of just two.
Currently, the Fed funds futures curve is pricing in only a 55% chance of a 25 basis point rate rise by September this year.
“Improving leading economic indicators and easing financial market tension have supported the rally in commodity prices, equity markets and AUD/USD,” CommBank’s senior currency strategist Elias Haddad said in a note.
Any move by the US Federal Reserve’s Federal Open Market Committee (FOMC) at its meeting this week to dilute its concerns about the risks to the US economy could encourage markets to rethink the Fed’s timetable on rate rises in 2016. This is supporting the USD.
Higher US interest rates could spark a temporary correction in commodity prices and equity markets, which in turn could weaken the Aussie against the greenback.
CommBank analysts think AUD/USD will trade within a broad US75 cents to US80 cents range over the next few months and the bank’s Economic Momentum Indicator remains well into positive territory.
The Reserve Bank of Australia (RBA) cash rate is expected to remain steady at the current record low 2% for 2016, although the central bank does hold a conditional easing bias to lower rates further should it deem it necessary for the economy.
The next RBA board meeting to discuss the cash rate will be held on May 3 and that evening, the Federal Budget is announced by the Government.
With domestic activity levels expected to slow ahead of a Federal election sometime after the Budget announcement and September traditionally a muted month on the markets, this does pose the question of where investor sentiment will head from here.