Medium Term / Buy
Head of FX Strategy
Price Target: 0.7700 and 0.7800
Market Price: 0.7422
Iron ore prices have jumped again, up some 20% from the range this spring and despite all of the trade war rhetoric. This is Australia’s largest single commodity export, most of it going to China. If China is set to launch another round of stimulus to stave off the risk of its recent deleveraging attempts leading to a hard landing, Australia’s currency would benefit from the injection of fresh cash and mining activity.
Already, Australia’s terms of trade have improved remarkably in recent years relative to its history of running large deficits, even as iron ore prices have been in a slump until recently.
Time Horizon: Medium-term
Global risk appetite is improving. Our Global Risk Indicator appears to be moving back into positive territory for now after getting mired in the negative since early February – and within the G10, AUD is the classic proxy for risk appetite. Global risk has receive an additional boost from China’s move to stem the weakness in its currency before the official RMB basket reached new lows and before USDCNY threatened the 7.00 level.
See relevant charts below for more.
The long term downside risks to Australia include the eventual risk that tightening lending standards will deal a blow to economic growth via a traditional credit crunch, but this risk could be beyond the horizon of a short- to medium-term change of attitude for the better on the Aussie’s prospects.