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Commodity rebound not enough for Aussie dollar
ETF Securities FX Research: Commodity rebound not enough for Aussie dollar Aussie dollar has tracked global commodity prices higher in 2016, but soft domestic conditions will pressure the local currency. Corporate earnings have remained lacklustre, just 5% above the multi-year lows
China’s growth remains robust, but the softening trend is a bearish factor for AUD. The commodity price rebound won’t be enough to offset AUD declines.
Futures market pricing remains buoyant, but appears to be rolling over. The options market indicates that AUD has the lowest level of optimism of G10 currencies for growth in coming months.
Commodity price rebound
The Australian Dollar (AUD) is one of the major global commodity currencies, as its economy is closely tied to its export base. Commodity markets have begun to recover in 2016, and the AUD has rallied by over 4% in 2016 – the fourth best performing G10 currency in 2016 after the JPY, and the ‘other’ commodity currencies (NOK & CAD). Australia’s major commodity exports are iron ore and coal. Both commodities have recorded stellar gains in 2016, rising 23% and 78%, respectively, and the strong links of the Australian economy to commodity exports have buoyed the local currency. These bulk commodities take a 54% weighting in the Reserve Bank of Australia (RBA) Commodity Index.
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Nonetheless, the Aussie dollar has been weighed down by the sharp decline in company profits in recent years. As a result, capital expenditure plans have been put on hold, particularly in the resources sector. However, the non-mining economy is broadly picking up the slack, with construction, and public spending propping up the economy in 2016. And profits have begun to edge higher this year, helping the AUD to track toward the top of its range in recent months.
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Chinese growth robust but softening
Another area of growth for the Australian economy this year has been exports. There is a strong correlation between the terms of trade (the amount that Australia receives for its exports relative to what it pays for imports) and the Aussie Dollar. As Australia’s largest trading partner, the Chinese economy remains a significant determinant of the performance of the Australian currency.
The growth path of China will determine future demands of Australia’s output, in turn impacting the strength of the Australian dollar – the greater the demand, the greater the buoyancy for commodity prices.
The driver of China’s economy is moving toward a more domestic demand driven, services sector led growth. Accordingly, we feel that growth indicators, like the Li Keqiang index are somewhat outdated and should include new measures that represent a growing services sector, like retail spending and internet usage.
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Our modified Li Keqiang Index shows growth should continue to be elevated, although the trend is lower. The softening growth path is likely to lead to a weaker AUD. While commodity prices will be continually supported by Chinese demand, we expect that it will not be enough to buttress the Aussie dollar at current levels.
Central bank policy
Interest rates also play a key role for currency movements in the shorter term. Accordingly, both Australian and US central bank policy can substantially affect the value of the AUD.
Although the Reserve Bank of Australia (RBA) has continued to cut interest rates (dropping the official rate to 1.5% in August – the lowest level on record) the Aussie Dollar has been resilient. The market expected the central bank should have done more to support the domestic economy in order to fulfil its price stability mandate, and as a result AUD continued to rally. We feel the rally is beginning to lose momentum. Despite cutting rates twice during 2016, in an easing cycle that has spanned the past five years, we expect that the RBA will keep rates on hold for a protracted period, although inflation remains low. Price pressure is likely to remain lacklustre for a prolonged period because of the absence of wage growth. In contrast, the US Fed is likely to continue its tightening cycle.
The combination of a neutral bias for policy in Australia, matched with the upward path for rates in the US, we expect that the Australian dollar is unlikely to break to the upside of its recent A$0.72-0.78 range against the US Dollar. With the US Federal Reserve already beginning to tighten policy, albeit extremely gradually, and with the likelihood of lifting rates again in 2016, widening rate differentials should provide US Dollar support. Accordingly, we expect the Australian dollar to grind lower toward the bottom end of the range in the coming months.
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Another way to trade a softer AUD is via the British Pound (GBP). GBP/AUD is hovering at the lowest level in three years after the ‘flash crash’ in GBP last week. We expect that GBP has overshot fundamental drivers to the downside and with risks balanced for a downside move for AUD, we feel that GBP/AUD could see a significant rebound toward A$1.65 from A$1.60 in the near term.
Market pricing
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Futures market net long positioning has rebounded in recent weeks, towards the 2016 highs. With the AUD trading around the top of the 2016 range, options market pricing shows that the AUD has the lowest level of optimism of G10 currencies for growth.
Important Information
General
This communication has been issued and approved for the purpose of section 21 of the Financial Services and Markets Act 2000 by ETF Securities (UK) Limited (“ETFS UK”) which is authorised and regulated by the United Kingdom Financial Conduct Authority (the “FCA”).
2024 was a landmark year for bitcoin, solidifying its role as a fully institutionalised asset class.
Institutional inflows into physical bitcoin exchange-traded products (ETPs) reached nearly $35 billion globally, signalling a major shift in how traditional investors view crypto. As bitcoin continued to enhance portfolios’ risk-return profiles, more institutional investors followed suit, reshaping the financial landscape.
Looking ahead, 2025 promises to bring exciting developments across the crypto ecosystem. Here are the top five crypto trends to watch.
Fear of being left behind
The era of bitcoin as a niche investment is over. Institutional adoption is creating a ripple effect, forcing hesitant players to reconsider. Portfolios with bitcoin allocations are consistently outperforming those without, highlighting its growing importance.
Figure 1: Bitcoin in a multi-asset portfolio
| 60/40 Global Portfolio | 1% Bitcoin Portfolio | 3% Bitcoin Portfolio | 5% Bitcoin Portfolio | 10% Bitcoin Portfolio | MSCI AC World | Bloomberg Multiverse | Bitcoin | |
| Annualised Return | 5.77% | 6.46% | 7.83% | 9.20% | 12.57% | 9.07% | 0.56% | 56.24% |
| Volatility | 8.79% | 8.86% | 9.14% | 9.62% | 11.42% | 13.94% | 5.05% | 67.28% |
| Sharpe Ratio | 0.48 | 0.55 | 0.68 | 0.79 | 0.96 | 0.54 | -0.20 | 0.81 |
| Information Ratio | 1.01 | 1.01 | 1.01 | 1.00 | ||||
| Beta | 70% | 71% | 73% | 75% | 81% | 100% | 24% | 181% |
Source: Bloomberg, WisdomTree. From 31 December 2013 to 30 November 2024. In USD. Based on daily returns. The 60/40 Global Portfolio is composed of 60% MSCI All Country World and 40% Bloomberg Multiverse. You cannot invest directly in an index. Historical performance is not an indication of future performance and any investment may go down in value.
With bitcoin’s ability to noticeably improve portfolios’ risk-return profiles, asset managers face a clear choice: integrate bitcoin into multi-asset portfolios or risk falling behind in a rapidly evolving financial landscape. In 2025, expect the competition to heat up as clients demand exposure to this powerhouse cryptocurrency.
Expanding crypto investment options
In 2024, regulatory breakthroughs opened the doors for physical bitcoin and ether ETPs in key developed markets. This marked a critical step towards making cryptocurrencies mainstream, providing seamless access to institutional and retail investors alike.
Figure 2: Global physical crypto ETP assets under management (AUM) and 2024 net flows
Source: Bloomberg, WisdomTree. 02 January 2025. Historical performance is not an indication of future performance and any investment may go down in value.
In 2025, this momentum is expected to accelerate as the crypto regulatory environment becomes more friendly in the United States and as key developed markets follow Europe’s lead and approve ETPs for altcoins such as Solana and XRP. With their clear utility and growing adoption, these altcoins are strong candidates for institutional investment vehicles.
This next wave of altcoin ETPs will expand the diversity of crypto investment opportunities and further integrate cryptocurrencies into the global financial system.
The maturing of Ethereum’s layer-2 ecosystem
Ethereum’s role as the backbone of decentralised finance (DeFi), non-fungible tokens (NFTs), and Web3 is unmatched, but its scalability challenges remain a hurdle. Layer-2 solutions—technologies such as Arbitrum and Optimism—are transforming Ethereum’s scalability and usability by enabling faster, cheaper transactions.
In 2025, Ethereum’s recent upgrades, such as Proto-Danksharding (introduced in the ‘Dencun’ upgrade), will drive layer-2 adoption even further. Innovations like Visa’s layer-2 payment platform leveraging Ethereum for instant cross-border transactions will underscore the platform’s evolution.
Expect Ethereum’s layer-2 ecosystem to power real-world use cases ranging from tokenized assets to decentralised gaming, positioning it as the infrastructure of a truly scalable digital economy.
Stablecoins: bridging finance and blockchain
Stablecoins are becoming indispensable to the global financial system, offering the stability of traditional assets with the efficiency of blockchain. Platforms such as Ethereum dominate the stablecoin landscape, hosting stablecoin giants Tether (USDT) and USD Coin (USDC), which facilitate billions in daily transactions.
Figure 3: Key stablecoin chains
Source: Artemis Terminal, WisdomTree. 05 January 2025. Historical performance is not an indication of future performance and any investment may go down in value.
As we move into 2025, stablecoins will increasingly interact with blockchain ecosystems such as Solana and XRP. Solana’s high-speed, low-cost infrastructure makes it ideal for stablecoin payments and remittances, while XRP Ledger’s focus on cross-border efficiency positions it as a leader in global settlements. With institutional adoption rising and DeFi applications booming, stablecoins will serve as the backbone of a seamless, interconnected financial ecosystem.
Tokenization: redefining ownership and revolutionising finance
Tokenization is set to redefine how we think about ownership and value. By converting tangible assets like real estate, commodities, stocks, and art into digital tokens, tokenization breaks down barriers to entry and creates unprecedented liquidity.
In 2025, tokenization will expand dramatically, empowering investors to own fractions of high-value assets. Platforms such as Paxos Gold and AspenCoin are already showcasing how tokenization can revolutionize markets for gold and luxury real estate. The integration of tokenized assets into DeFi will unlock new financial opportunities, such as using tokenized real estate as collateral for loans. As tokenization matures, it will transform industries ranging from private equity to venture capital, creating a more inclusive and efficient financial system.
For the avoidance of any doubt, tokenization complements crypto by expanding the use cases of blockchain to include real-world applications.
Looking ahead
2025 is set to be a defining year for crypto, as innovation, regulation, and adoption converge. Whether it is bitcoin cementing its position as a portfolio staple, Ethereum scaling for mainstream use, or tokenization unlocking liquidity in untapped markets, the crypto ecosystem is poised for explosive growth. For investors and institutions alike, the opportunities have never been clearer or more compelling.
This material is prepared by WisdomTree and its affiliates and is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. The opinions expressed are as of the date of production and may change as subsequent conditions vary. The information and opinions contained in this material are derived from proprietary and non-proprietary sources. As such, no warranty of accuracy or reliability is given and no responsibility arising in any other way for errors and omissions (including responsibility to any person by reason of negligence) is accepted by WisdomTree, nor any affiliate, nor any of their officers, employees or agents. Reliance upon information in this material is at the sole discretion of the reader. Past performance is not a reliable indicator of future performance.
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