The CBA sees an aggregate price drop of around five per cent for commodity prices over 1999 compared with a fall of 11.7 per cent in dollar terms in 1998.

The expected 5 per cent fall in 1999 would leave the CBA's new index, which will have 1997 as its base year, at historically low levels, CBA said. "We expect some further declines in commodity prices and some widening in the current account deficit (in 1999)," CBA said.

"These trends will act as a drag on the Australian dollar. They suggest that the risks remain on the downside," it said. CBA sees a volatile short-term market for the Australian dollar leading to a $0.61-$0.68 range over a three-month view and a $0.62-$0.68 band over a six-month view.

The Australian dollar was a commodities currency and would move up and down with commodity prices, Bruce Freeland, CBA's chief economist, said.

The Commodity Research Bureau (CRB) index, issued in the US, so far had been the index of choice for international currency traders, Freeland said. But it was not appropriate to Australian conditions, with different weightings and different commodities from Australian production, he said.

The daily CBA commodity price index is composed of commodities relevant for Australia and weighted according to Australian trade. CBA's daily index follows its publication of a weekly index since 1986. "The CBA commodity price index has a much better track record in determining the Australian dollar's direction than the CRB or other non-Australian specific indices," Freeland said.

The index is based on 15 major commodities that account for about 66 per cent of Australia's commodity exports. It covers the major metals of aluminium, copper, lead, zinc, nickel, gold and iron ore. It also covers the more important rural exports of wool, wheat, cotton, sugar and beef. The energy commodities of oil and steaming and coking coal are also included.

The index has 70 per cent of its weight related to energy and industrial usages, in line with Australia's export experience, CBA said.

Metals make up 44 per cent of the index, followed by energy on 27 per cent, food on 18 per cent and fibres on 11 per cent.

In contrast, food makes up 46 per cent of the CRB index, followed by metals on 24 per cent, energy on 18 per cent and fibres on 12 per cent.

The Economist commodity index is also dominated by food on 49 per cent, followed by metals on 33 per cent and fibres on 18 per cent. There is no energy component.

"Market sentiment and trading flows can dictate the shortrun direction of any currency. But over the longer run, the economic fundamentals will win out," CBA economists Michael Blythe and Michael Workman said.

"In Australia's case, the most significant fundamental is commodity prices."

Sources said demand for commodities was expected to remain subdued in 1999, with further price falls likely.