Australian Dollar (AUD) Exchange Rates Bolstered by Iron Ore Surge
The Australian Dollar US Dollar (AUD/USD) exchange rate proved resilient on Monday, bolstered by an extended surge in iron ore prices – Australia’s primary export.
Iron ore markets extended their gains into Monday, supported by strength in Chinese steel futures that was fuelled by speculation that policymakers may soon extend production cuts that were scheduled to end on the 15th of March.
This would extend the cuts beyond winter for Tangshan, China’s top steelmaking city, measures that would reduce the national output by a whopping 3%.
Daniel Meng, Analyst at CLSA Hong Kong shared his thoughts on this possibility:
‘That 3% is quite big in today’s steel market, because without any curtailment in the normal months like in July-October last year, the market was already very tight and margins were around 1000 yuan (per tonne)’.
A drop in steel production would traditionally hurt iron ore prices, however it would appear that the surge in steel prices may have encouraged mills to leap upon the opportunity to obtain more efficient, higher grade ore during the session, thus driving iron ore higher.
Nonetheless, some analysts have asserted that this is simply a recovery, with iron ore soon set to come under pressure once again.
One iron ore trader in Shanghai told Reuters:
‘I think it was just a technical recovery. But we should see prices under pressure again as we’re getting close to the holidays and trading activity will slow down’.
This news buoyed the ‘Aussie’ Dollar, negating some of the damage of the currently rallying US Dollar.
US Dollar (USD) Exchange Rates Surge on Upbeat US Services ISM
The US Dollar (USD) extended its rally on Monday, bolstered by a run of upbeat ISM Purchasing Managers’ Index (PMI) readings.
The US ISM non-manufacturing PMI jumped to a whopping 59.9 in January, up from December’s upwardly revised score of 56 and smashing the market forecast of 56.5.
This reading tracks the performance of service-oriented companies like hotels, restaurants and banks, ultimately boding extremely well for the outlook of the US economy.
Indeed, this reading marked the strongest expansion within the services sector since August of 2005, with rising production, new orders and employment helping to propel the figure.
ISM discussed the readings:
‘Overall, the majority of respondents’ comments are positive about business conditions and the economy. They also indicated that recent tax changes had a positive impact on their respective businesses’.
This news proved insufficient, however, with the AUD/USD exchange rate continuing to remain in the ‘Aussie’ Dollar’s favour as the day progressed.
AUD/USD Exchange Rate Forecast: Trade Balance Readings and Fed Policymaker Talks Ahead
The AUD/USD exchange rate could encounter some volatility as the week progresses as markets respond to trade balance figures for both nations and a run of speeches from US Federal Reserve Policymakers.
Australia’s trade balance, due on Tuesday, is expected to post a surplus reading of A$200m in December, up from the previous period’s –A$628m, whilst the US trade deficit (also due on Tuesday) is expected to widen from -$50.5b to -$52.0b – an event that could provide additional support for AUD/USD.
How long this will last, however, is questionable, with various Fed policymakers set to speak throughout the week.
Fed James Bullard is set to speak on the US economy and monetary policy on Tuesday, whilst Fed Presidents Robert Kaplan, Charles Evans, William Dudley and John Williams (a notorious hawk) are all due to talk on Wednesday.
Given recent optimistic comments from the previous Fed Chairman Janet Yellen and the surprisingly robust performance of the US economy as of late it is likely that these speakers will use the opportunity to espouse a hawkish outlook – an event that could put the AUD/USD exchange rate under renewed pressure.