Australian Dollar Bothered by Iron Ore Price Decline: CBA

Iron ore prices and the Australian Dollar

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  • GBP/AUD spot rate at time of publication: 1.7782
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Analysts at Commonwealth Bank of Australia have shed some light on today's underperformance in the Australian Dollar, saying a decline in iron ore prices could be considered to be a major driver.

"AUD/USD is weighed down by a decline in iron ore prices," says Elias Haddad, Senior Currency Strategist at Commonwealth Bank of Australia. "Iron ore future prices fell to near a three‑week low on steel demand concerns in China."

At the time of writing the Australian-U.S. Dollar exchange rate is quoted at 1.7771, the Australian-to-U.S. Dollar exchange rate at 0.7301 and the Euro-Australian Dollar exchange rate at 1.6162

Iron ore is Australia's main export earner and is therefore a significant fundamental driver of Australian Dollar value. The rise in iron ore prices since March has in a large part been driven by demand for China, where government stimulus initiatives have seen demand for iron ore rise as new development projects come on line.

Demand has been further buoyed by the record-breaking summer floods the country has endured, with significant infrastructural developments needed to boost Yangtze River flood defences.

However, the rally in iron ore might be coming to an end with CBA's commodity strategists saying steel market participants are particularly concerned that demand from China’s infrastructure and real estate sectors could be faltering.

Iron ore prices Australian Dollar

Furthermore, prices will likely come under pressure as production in Brazil - Australia's main global competitor for the extraction of iron ore - ramps up, following shutdowns owing to the country's severe covid-19 outbreak.

Howeer CBA expect prices to remain relatively supported over coming weeks, even if the lion's share of 2020 gains are now in the rear view mirror.

"We still expect China’s steel demand impulse to remain resilient for the remainder of 2020, particularly on the infrastructure side as local governments exhaust their special bond quotas by the end of October. We should see China’s commodity demand impulse eventually fade in early 2021 as policy support measures ease," says Haddad.

Because the Australian Dollar is consider a 'commodity currency' it stands that the performance of the broader commodity sector must also be considered, and on this basis short-term dynamics are currently unhelpful.

Three-month base metal futures prices on the LME were down between 0.3% for aluminium and 1.8% for nickel amidst a rising U.S. Dollar. LME copper fell by the most in seven sessions, down 1.5% earlier this morning to a low of $6,676/oz before paring some losses

Stocks and commodity prices have come under pressure over the short-term as investors express a negative reaction to the September policy meeting of the U.S. Federal Reserve where settings were left unchanged and communications offered little promise of any further support from the world's de facto central bank.

"A lingering sense of disappointment hangs over global markets in the wake of the Fed meeting last night. Investors had evidently hoped for something much more concrete than the relatively vague policy outlook provided by Powell and co, with equities struggling in early trading and the dollar finding some support," says Chris Beauchamp, Chief Market Analyst at IG.

We would expect the commodity complex and the Aussie Dollar to remain under pressure as long as broader U.S. Dollar dynamics are keeping the complex down.

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