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The Australian Dollar Surges on OECD Upgrade, Chinese Coal and Steel Cuts

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The Pound to Australian Dollar exchange rate has fallen to its lowest level in ten days as the Australian currency is supported by the recovery in global commodity prices.

The Australian Dollar continues to find support from a rise in industrial metal prices, including iron ore which is the country's largest export. 

"Steel, iron ore and base metals prices continue to rise as the OECD raises its outlook for economic growth for this year and next," says John Meyer, an analyst with SP Angel in London.

More robust global growth will play into the bet that the price of Australia's key exports - iron ore and coal - will rise and increase demand for Aussie Dollars.

The OECD move coincides with a more bullish outlook for growth partly driven by the election of Donald Trump and his policies on creating growth but also on more general positive momentum within the global economy.

Increased demand from China has also pushed prices up as the Chinese seek to stockpile commodities at their relatively low current prices ahead of a increased demand from the US on the back of Trump's stimulus policies that seek to invest ~$500BN into infrastructure projects.

Trump's threat of tariffs on Chinese imports has also prompted the Chinese into stockpiling so they can produce products as cheaply as possible to remain competitive despite any new tariff premiums.

China was also seen to have had a hand behind AUD's rise at the head of the new week with local news agency Xinhua reporting China has reiterated its stance on cutting excess steel and coal capacity in response to moves by producers driven by recent price rises.

China closed 45mt of steel and 250mt of coal capacity in the year to end October meeting its full-year target ahead of schedule.

Short term demand growth is said to have created an unexpected demand-supply gap pushing up steel, coal and iron ore prices.

Latest Pound / Australian Dollar Exchange Rates

United-Kingdom Australia
Live:

1.7635▼ -0.73%

12 Month Best:

1.8448

*Your Bank's Retail Rate

 

1.7036 - 1.7106

**Independent Specialist

* Bank rates according to latest IMTI data.

** RationalFX dealing desk quotation.

 

Steel and coal are still seen to be in overcapacity and leading to longer-term excess supply.

China reports it will continue capacity cuts but will pay greater attention to prices.

Investigators are being sent to Hebei and Jiangsu where capacity cut rules were breached to intensify supervision and root out fraud and illegal production.

The state is going for zero tolerance with steel and coal producers that fail to meet national and environmental standards.

This cut in capacity will naturally push up prices and with it the value of Australia's exports.

The gains in these key commodities have underpinned a resilient AUD and are likely to as long as they continue.

Indeed, analyst Robert Rennie at Westpac in Sydney reckons the Australian Dollar's fair-value level is on the up:

The new paradigm for commodities may support their next wave up, as it represents an important fundamental shift.

Pound Supported

Despite a soft start to the week, Sterling remains the global outperformer for November - the currency being underpinned by recent data, which has been surprisingly strong.

Last week’s Q3 GDP revisions showed no change from the positive preliminary estimates, helping to support confidence further.

Whilst growth remains lopsidedly weighted in favour of Services and out of favour with Construction, the fact that Business Investment beat expectations was reassuring to those who had feared companies would put off investment decisions in the wake of the uncertainty created by Brexit.

One proviso is that analysts are cautioning not to read too much into the data, with both Markit and Capital Economics making the point that Q3

Investment decisions may have already been taken and the real hit to investment is likely to come after Article 50 is triggered, however, overall it cannot be argued the data is weak.

GBP/AUD Chart Forecast

GBP/AUD has pulled back after peaking at 1.6992.

The pull back is shallow and therefore likely to lead to a resumption of the uptrend, which is expected to extend after breaking above a key trendline on the weekly chart.

A move above the 1.6992 highs would confirm a continuation to 1.7100.

The MACD indicator (circled on the chart below) is above the zero-line which suggests the trend is bullish.

GBPAUDNov26

It is, however, ‘cresting’ which seems to suggest the possibility it may be peaking and about to move lower, although it is too early to say for sure.

Data to Watch for the Australian Dollar

The big release for the Aussie is October Retail Sales on Friday, December 3, which is forecast to show a 0.3% rise mom in October from 0.6% previously.

The Aussie may also be influenced by Chinese data including November Manufacturing PMI’s out on Thursday, December 2 at 1.00 and 1.45 (GMT).

Given the Aussie is an established Oil producer, the OPEC meeting on November 30 is also likely to have an impact as the world awaits another supply freeze deal.

Data to Watch for the Pound

The main release in the week ahead is Manufacturing PMI in November on Thursday, December 1, which is forecast to rise to 54.5 from 54.3 previously.

Construction PMI, out on Friday, December 2, is forecast to fall to 52.3 from 52.6 previously.

 

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