The historical data strongly suggests that the AUDUSD appreciation is a function of crude oil prices and not US/Australia interest rate differentials.
But why, we hear you protest, would Australia, a leading natural gas exporting nation and not a material exporter of crude oil, have a foreign exchange rate inextricably linked with crude oil prices? Good question, protesting blog reader.
To understand this counterintuitive outcome, we need to distinguish between (a) the recent vintage of North American LNG exports, and (b) the LNG export model used by most nations for the last 30+ years.
Unlike North America, Australian LNG exports are priced based on a crude oil price index with a significant lag (and other adjustments which are not important for this discussion).
There are various historical and economic reasons for pricing LNG based on an index of lagged crude oil price (generally referred to as the "S-curve" because of the sale price moderation when crude oil prices reach "extreme" levels).
For better or worse, the recent North American LNG export contracts are priced almost entirely based on an index of Henry-Hub natural gas prices. Nor do they require the LNG exporter to own the natural gas reserves (or production) that is being exported; unlike in Australia, Qatar and most other LNG export contracts.
[Feel free to skip the next paragragh and the associated chart if statistics talk doesn't make you jump out of bed in the morning]
As an aside, there have been periods of relatively high correlation between various commodity prices (including, crude oil with other indexed commodities) which may also contribute to this dynamic of a stronger Aussie dollar in response to higher commodity prices (with the price of crude oil being a "proxy" for other highly correlated comodities such as coal, iron ore, gold, etc). However, this depends very much on the time period under consideration and the length of the measurement period.
[Ok, now back to our regularly scheduled programing]
Returning to the Australian dollar, if you are bearish on global crude oil prices - as we are, given its asymmetrical risk-reward profile and the relatively flat, elongated global crude production cost curve - you may want to roll back your long Aussie dollar bets.
The good news is that if this historical relationship between the Aussie dollar and crude oil prices continues into the future, it means that you can stop fretting about the future direction of Australian interest rates (within reason, of course, let's not get crazy here).
Why is this good news? (are you protesting ... again...)
Simply put, there is currently a daunting task for interest rate forecasters (not to mention the herculean task faced by the Reserve Bank of Australia) in balancing exuberant residential housing prices (i.e. average residential property prices relative to median annual income, combined with elevated household debt to GDP ratios) and, what appears to be, slowing economic growth. The recent impressive rally in other Australian export commodity prices has further complicated the interest rate forecasting exercise amid questions over the durability and extent of the current commodity price rally for coal, iron ore, and other key Australian commodity exports.
If history is any guide - insert disclaimer about "history never repeats, it rhymes" here - we can simplify the Aussie dollar analysis and focus most of our attention on future crude oil price paths. If, on the other hand, you are agnostic about future crude oil prices then move along, nothing to see here.