FX View from Down Under : AUD ignoring seasonally weak iron ore; FXWW

From the FXWW Chatroom: The AUD has been resilient of late, despite the backdrop of falling iron ore prices and mining equities (figure 1). Can this persist? The broader growth story still looks supportive – global data surprises remain positive, earnings revisions are strong across regions, and EM equities are holding up well (figure 2). On China specifically, yesterday’s industrial production and investment data beat expectations by a healthy margin, continuing a trend of better data. Adding IP and the PPI gives a good proxy for nominal growth, and suggests a broadly stable AUD/USD (figure 3).

So why has the iron ore price fallen? Seasonality is the likely culprit – March is typically a bad month for the iron ore price (figure 4). It may be that traders get worried about steel oversupply as production ramps up after the Chinese New Year break. Alternatively, this year there may be concern about the extension of steel output restrictions to curtail pollution. But the steel price is still firm, and overall Chinese growth looks fine.

Bottom line: the AUD has already looked through iron ore price weakness – on balance the global picture is likely to stay supportive. We’d look to sell AUD/USD at 80c, and wait for domestic developments (poor consumer spending, weakening flows) to take AUD/USD towards our mid-year target of 76c.

2018 Mar 14 Tim Baker

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