# Commodity price correlation with $AUD



## Rainmaker (5 May 2007)

This gets talked about a lot, but I was wondering what the specific economic theory is behind strong commodity prices giving way to an appreciation in the Aussie? 

If commodity prices rise, that boosts export income and also we have a trade surplus, but why does that stimulate foreign demand for the AUD and hence we get an appreciation?


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## stoxclimber (7 May 2007)

Lets say a company is going to buy $1000USD of zinc from Australia. The zinc price is $1000 a tonne, so they're buying 1 tonne.

Then, the price of zinc rises to $1500USD. As demand should be inelastic, the company is still going to want most of that tonne - lets assume all of it.
So, the miner will be getting $500 more USD than before, and thus will demand more AUD. So the AUD/USD should rise.


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