The Australian dollar ended the month of May 2012 at USD0.9734. It rose to USD1.0238 by Jun. 29, 2012, the last day of the next trading month. That’s a 5.18 percent gain for the aussie versus the US dollar.

At the same time, and defying conventional wisdom, commodity prices were declining. The Reserve Bank of Australia’s (RBA) preliminary estimate for June, released Jul. 2, 2012, suggests that its Index of Commodity Prices (ICP) fell by 0.7 percent on a monthly average basis in SDR terms, after falling by a 1.3 percent in May.

(“SDR” refers to “special drawing rights, the International Monetary Fund’s unit of account. The SDR is an international reserve asset, created by the IMF in 1969 to supplement its member countries’ official reserves. Its value is based on a basket of four key international currencies, those of the eurozone, Japan, the UK and the US.)

According to the RBA, “The ICP provides a timely indicator of the prices received by Australian commodity exporters.” It’s a Laspeyres index, which means that it’s a weighted average of recent changes in commodity prices. The ICP weighs prices of 20 of Australia’s key commodity exports, which currently account for around 85 per cent of primary commodity export earnings.

These include (with index weightings as of September 2009 in parentheses) “rural commodities” such as beef and veal (4.1 percent), wheat (2.9 percent), wool (1.6 percent), milk powder (1.0 percent), sugar (1.5 percent), barley (0.6 percent), canola (0.5 percent) and cotton (0.4 percent); “base metals” such as aluminum (4.1 percent), copper (2.8 percent), lead (1.2 percent), zinc (1.0 percent) and nickel (0.6 percent); and “other resources” such as metallurgical coal (15.9 percent), iron ore (20.8 percent), thermal coal (9.8 percent), gold (15.1 percent), liquefied natural gas (5.1 percent), crude oil (7.3 percent) and alumina (3.8 percent).

The biggest factors in the ICP’s June decline were decreases in the prices of oil and thermal coal. The prices of base metals and most rural commodities also declined. Prices of coking coal and gold rose in the month. In Australian dollar terms the index fell by 1.7 percent in June.

Over the past year ICP has fallen by 10.5 percent in SDR terms. Much of this fall has been due to falls in the prices of coking coal and iron ore. The index has fallen by 9.9 percent in Australian dollar terms over the past year.

The Australian dollar, meanwhile, has softened versus the US dollar during this time, but only by 4.94 percent, from USD1.0770 on Jul. 1, 2011, to the previously noted USD1.0238 on Jun. 29, 2012.

The Australian dollar and the iron ore price have largely moved in unison over the last four to five years, with a correlation of approximately 20 percent since the start of 2008. But this relationship has started to break down in the last 12 to 18 months. The aussie has remained resilient, while prices of iron ore and thermal coal have trended lower.

Over this period the relationship has actually moved to a negative correlation, meaning the Australian dollar and commodities generally move in opposite directions. These recent movements defy the long-held belief that the Australian dollar is a proxy for commodity strength and vice versa.

Part of the explanation for this breakdown of the relationship between the aussie and commodity prices–or, put another way, the resilience of the Australian dollar–is that a significant increase in foreign purchases of Australian bonds has also driven capital into Australia, complementing the huge flow of mining and resource investment from abroad.

Foreign central banks and sovereign wealth funds (SWF) have been making concerted efforts to diversify their reserves, with Australian bonds an increasingly attractive alternative.

These foreign purchases reflect some increase in the supply of bonds to finance government budget deficits. But the share of bonds held by foreigners has jumped from 57 percent in 2006 to 84 percent as of June 2012, and some estimates suggest that up to a third of Australian government bonds are held by central banks aiming to diversify their holdings from the US dollar.

According to IMF data, “other” currencies, a category that includes the Australian dollar, now rank third overall in terms of official foreign exchange reserves. “Other” surpassed the Japanese yen to take fourth place during the fourth quarter of 2009 and leapt over the British pound for third place in the third quarter of 2010.

The US dollar and the euro remain in first and second place, respectively, but “other’s” share has grown substantially in the 21st century, from 1.49 percent of allocated reserves in 2000 to 5.49 percent in 2011.

The substantial increase in issuance by both non-government and government entities has promoted liquidity and demand in the Australian bond market from foreign investors. Increased demand from foreign entities is recognition of Australia’s strength relative to the rest of the developed world.

This demand reflects Australia’s comparatively low public debt (the federal government’s fiscal position is forecast to move back into surplus in the current fiscal year), strong growth, high interest rates and the reduced global pool of AAA- rated assets.

The aussie is surging this week on new, new hopes for a solution to Europe’s problems, from a closing low of USD1.0221 on Tuesday, Jul. 24, to USD1.0433 as of this writing midday Friday, Jul. 27, in the aftermath of European Central Bank (ECB) President Mario Draghi’s statement that the “euro is irreversible” and that his institution would do “whatever it takes” to preserve the common currency.

This suggests the possibility of a new round of purchases of Spanish and Italian bonds, and it also suggests that the ECB, subject to German acquiescence, will engage in its own sort of “quantitative easing.” US Federal Reserve Chairman Ben Bernanke is already poised to instigate a third round of such electronic money-printing, as monetary authorities around the world fill the void left by fiscal authorities in an effort to stimulate growth in the short term.

China, the Middle Kingdom that looms literally and figuratively over Australia, is also getting back into the stimulus game. The People’s Bank of China (PBOC) cut its benchmark interest rate for the second time in less than a month in early July following a spate of disappointing economic data. And Bloomberg reports that the State Council of the People’s Republic of China has approved plans to promote the development of six provinces in the Central China region, including Hunan.

In addition, the central Chinese city of Changsha, with a population of 7 million, has announced a CNY829.2 billion (USD130 billion) investment plan, which is about 150 percent of the city’s 2011 gross domestic product. Changsha’s fixed-asset investment was CNY351 billion in 2011, including both public and private investment. The new program, over the planned five-year period, equals about CNY160 billion a year.

These are all positive developments for global growth, and they’re all positive for the Australian dollar as well. Rising demand from China and elsewhere will provide a lift for commodity prices, and the fundamentals Down Under, including its fiscal position as well as its domestic expansion, will also improve.

Australia certainly appears to be, to borrow the recent words of Reserve Bank of Australia Governor Glenn Stevens, “the lucky country.”

The Roundup

APA Group (ASX: APA, OTC: APAJF), which as of this writing is the only AE Portfolio Conservative Holding trading below its buy-under target, has increased its offer for the outstanding shares of pipeline infrastructure investor Hastings Diversified Utilities Fund (ASX: HDF) following the granting of provisional clearance of the tie-up by the Australian Competition and Consumer Commission (ACCC).

APA’s new offer is “at least” AUD0.60 cash, a regular distribution of AUD0.025 per share to Hastings shareholders and a fixed amount of APA securities, bringing the bid to at least AUD2.525 per share.

The offer trumps a bid of AUD1.25 billion, or AUD2.325 per security, from Pipeline Partners Australia, a consortium of  Canada-based fund manager Caisse de depot et placement du Quebec and Utilities Trust of Australia, a fund managed by Hastings’ manager Hastings Funds Management.

In mid-December 2011 APA offered AUD0.50 in cash and 0.326 of its shares for each of the shares of Hastings it doesn’t own. That put Hastings’ overall market value at approximately AUD1.06 billion. The revised offer, which APA hopes to make formal next week, is valued at about AUD1.33 billion.

Hastings has assembled a team of directors to consult with APA on the new offer. APA Group, which is yielding 7.2 percent, is a strong buy under USD5.50.

Australand Property Group (ASX: ALZ, OTC: AUAOF), an Australian real estate investment trust (A-REIT) with industrial, office and residential assets, has surged in recent weeks, and its results for the first half of 2012 justified the move from AUD2.42 on the Australian Securities Exchange (ASX) on Jun. 5, 2012, matching its low for the calendar year, to a close on Friday, Jul. 27, Down Under of AUD2.76.

The A-REIT posted an operating profit after tax of AUD68.2 million, up 5 percent from the prior corresponding period, while statutory net profit after tax rose 6 percent to AUD89.7 million. Total revenue for the half surged by 41 percent to AUD393 million.

Operating earnings per security were AUD0.118. Australand will pay an interim dividend of AUD0.105 to shareholders of record as of Jun. 29 on Aug. 7. The ex-date for this distribution was Jun. 25.

Management maintained its forecast for an AUD0.11 distribution for the second half, which would bring the full-year distribution to AUD0.215 per stapled security.

Management reported comparable rental growth for the period of approximately 3.2 percent, while occupancy was 98.7 percent. The A-REIT’s portfolio has an average lease life of 5.7 years. High occupancy, long leases and fixed rental growth provided good earnings distribution coverage visibility.

Australand continues to manage its capital position prudently, with gearing of 32.6 percent–or total debt-to-total assets–within management’s target range of 25 percent to 35 percent. The A-REIT has no further corporate debt maturities until September 2013 and has adequate liquidity to fund development.

Management forecast growth in operating earnings for 2012 “in the order of 3 percent to 4 percent” over 2011. Australand Property Group is a buy under USD2.80.

New Aggressive Holding Grange Resources Ltd (ASX: GRR, OTC: GRRLF) has had a sudden an unsettling change at the very top of its leadership structure, as Managing Director Russell Clark announced Jul. 20, 2012, that he would leave the company after nearly four and a half years at the helm on Sept. 15, following a month-long handover period to Richard Mehan. Mr Mehan quit his role as Jupiter Mines chief executive last month after just over a year in the role.

Grange has fallen from AUD0.47 on the ASX on Jul. 19 to a Jul. 27 close of AUD0.385.

Mr. Clark said his resignation was triggered by personal reasons, which came after he had “ticked all the boxes” to get the Southdown magnetite project up and running.

Grange reported that production at its Savage River mine was 606,929 metric ton of concentrate in the June quarter, 21 percent higher than in the prior corresponding period. Guidance for Savage River remains at 2.3 million to 2.4 million metric ton of pellet production and sales in 2012, with a cost of production of around USD100 per metric ton. The average price received during the quarter was USD146.24 per metric ton of pellets, while total sales revenue for the quarter was AUD62.5 million.

Management forecast cash generation at Savage River “to remain strong throughout the next quarter.” Total debt at the end of the quarter was AUD39.6 million, down from AUD41.7 million at the end of March 2012. Cash, term deposits and trade receivables as of Jun. 30 were AUD232 million.

We’ll have more on the management change in the August issue of Australian Edge, which will be published Aug. 17. In the meantime, Grange Resources remains a buy for aggressive investors up to USD0.65.

Newcrest Mining Ltd (ASX: NCM, OTC: NCMGF, ADR: NCMGY) reported that gold production for fiscal 2012 declined 15.4 percent to 2,285,917 ounces from 2,701,918 in fiscal 2011, but output was is in line with previous production guidance provided by management.

Full-year copper production was up 0.53 percent to 76,015 metric tons from 75,631 metric tons in fiscal 2011 and bested management’s output forecast. Management noted during a conference call to discuss production for the quarter and the fiscal year that cash margins “remain strong” at USD970 per ounce, while cash costs were at USD604 per ounce.

For the final quarter of 2012 Newcrest produced 20,544 metric ton of copper and 587,310 ounces of gold.

Critically, gold output at the Lihir mine in Papua New Guinea was up 9 percent on the previous quarter. Newcrest reported that production increased by 36 percent in the June 2012 quarter at its Cadia gold mine in New South Wales but was lower at its Telfer mine in Western Australia due to reduced recovery and lower metric tons milled.

Newcrest said major project expansions at Cadia Valley and Lihir remained on schedule and the Lihir MOPU project was on budget and on schedule for completion in the December 2012 quarter.

Cash costs of USD2.03 billion for the fiscal 2012 were slightly below management’s most recent guidance range, while full-year unit costs of USD603 an ounce were within forecast. Newcrest remains a buy under USD32.

New Hope Corp Ltd (ASX: NHC, OTC: NHPEF) has launched an off-market takeover effort for the outstanding shares of unlisted oil and gas exploration and production company Bridgeport Energy Ltd it doesn’t already own. The bid of AUD0.41 per share, a 24 percent premium to a private placement Bridgeport made in April 2011, values the target at AUD76 million. The new undertaking would cost New Hope approximately AUD45 million.

Bridgeport’s independent diretors have unanimously recommended that shareholders accept the offer in the absence of a superior proposal. Bridgeport holds assets in the Eromanga basin of Queensland and in the Otway basin of Victoria, with a combined resource estimated at 7.6 million barrels of oil equivalent. New Hope Corp is a buy under USD6.

Oil Search Ltd (ASX: OSH, OTC: OISHF) posted total crude and gas production of 3.56 million barrels of oil equivalent for the six months ending Jun. 30, 2012, an 8.4 percent decline from the prior corresponding period, but maintained its full-year production guidance.

Output in the second quarter was actually up, by 1.8 percent to 1.8 million barrels of oil equivalent. Total revenue in the first half was up 7 percent to USD398.5 million, though second-quarter revenue declined 2.98 percent year over year due to declining oil prices.

Full-year production guidance remains between 6.2 million barrels of oil equivalent and 6.7 million barrels of oil equivalent. Management also noted that it’s close to deciding on partner or partners for its natural gas exploration assets in Papua New Guinea.

Managing Director Peter Botten, in search of joint venture partners experienced with liquefied natural gas (LNG) operations, has identified Exxon Mobil Corp (NYSE: XOM) and Royal Dutch Shell Plc (London: RDSA, NYSE: RDS/A) as backers. “In the Gulf of Papua, bids were received and negotiations are continuing with potential farm-in (joint venture) partners, with completion of a farm-out expected to conclude shortly,” the company said in a statement.

Current drilling activities are connected to the USD15.7 billion PNG LNG project, of which Oil Search owns 29 percent. PNG LNG remains on track to deliver first gas in 2014. Oil Search is a strong buy under USD8.

Following are dates (confirmed, tentative or estimated) for each AE Portfolio Holding’s next earnings announcement. Where companies have reported recently, we’ve included a link to our discussion and analysis of results.

Conservative Holdings

• AGL Energy Ltd (ASX: AGK, OTC: AGLNF, ADR: AGLNY)–Aug. 22, 2012 (confirmed, FY 2012, end Jun. 30, 2012)
• APA Group (ASX: APA, OTC: APAJF)–Aug. 22, 2012 (confirmed, FY 2012, end Jun. 30, 2012)
• Australand Property Group Ltd (ASX: ALZ, OTC: AUAOF)–Jul. 26, 2012 (confirmed, CY/FY 2012 1H, end Jun. 30, 2012)
• Australia & New Zealand Banking Group Ltd (ASX: ANZ, OTC: ANEWF, ADR: ANZBY)–May 2 Down Under Digest (FY 2012 first half, ended Mar. 30, 2012), Nov. 5, 2012 (estimate, FY 2012, end Sept. 30, 2012)
• Cardno Ltd (ASX: CDD, OTC: COLDF)–Aug. 14, 2012 (confirmed, FY 2012, end Jun. 30, 2012)
• CSL Ltd (ASX: CSL, OTC: CMXHF, ADR: CMXHY)–Aug. 21, 2012 (confirmed, FY 2012, end Jun. 30, 2012)
• Envestra Ltd (ASX: ENV, OTC: EVSRF)–Aug. 23, 2012 (confirmed, FY 2012, end Jun. 30, 2012)
• M2 Telecommunications Group Ltd (ASX: MTU, OTC: MTCZF)–Aug. 27, 2012 (confirmed, FY 2012, end Jun. 30, 2012)
• Telstra Corp Ltd (ASX: TLS, OTC: TTRAF, ADR: TLSYY)–Aug. 9, 2012 (confirmed, FY 2012, end Jun. 30, 2012)
• Transurban Group (ASX: TCL, OTC: TRAUF)–Aug. 7, 2012 (confirmed, FY 2012, end Jun. 30, 2012)

Aggressive Holdings

• BHP Billiton Ltd (ASX: BHP, NYSE: BHP)–Aug. 22, 2012 (confirmed, FY 2012, end Jun. 30, 2012)
• GrainCorp Ltd (ASX: GNC, OTC: GRCLF)–May 23 Down Under Digest (FY 2012 first half, ended Mar. 30, 2012), Nov. 14, 2012 (estimated, FY 2012, end Sept. 30, 2012)
• Grange Resources Ltd (ASX: GRR, OTC: GRLLF)–Aug. 30, 2012 (confirmed, FY 2012 1H, end Jun. 30, 2012)
• Mineral Resources Ltd (ASX: MIN, OTC: MALRF)–Aug. 20, 2012 (estimate, FY 2012, end Jun. 30, 2012)
• Newcrest Mining Ltd (ASX: NCM, OTC: NCMGF, ADR: NCMGY)–Aug. 13, 2012 (confirmed, FY 2012, end Jun. 30, 2012)
• New Hope Corp Ltd (ASX: NHC, OTC: NHPEF)–Sept. 20, 2012 (estimate, FY 2012, end Jul. 31, 2012)
• Oil Search Ltd (ASX: OSH, OTC: OISHF, ADR: OISHY)–Jul. 24, 2012 (confirmed, FY 2012 1H, end Jun. 30, 2012)
• Origin Energy Ltd (ASX: ORG, OTC: OGFGF, ADR: OGFGY)–Aug. 23, 2012 (confirmed, FY 2012, end Jun. 30, 2012)
• Rio Tinto Ltd (ASX: RIO, NYSE: RIO)–Aug. 8, 2012 (confirmed, FY 2012 1H, end Jun. 30, 2012)
• WorleyParsons Ltd (ASX: WOR, OTC: WYGPF, ADR: WYGPY)–Aug. 29, 2012 (confirmed, FY 2012, end Jun. 30, 2012)