In terms of Iron ore its Australia’s biggest export and its price has the biggest impact of any commodity on the Aussie dollar. In this article we will look at the impact of iron ore and other commodities on AUDUSD.
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Iron Ore Australia’s Biggest Export
Iron ore accounts for over 40% of all Australian export revenue and its major export market is China. Iron ore prices have fallen significantly from their year-to-date high of US$171/t at present we are above US$120/T after reaching a low of $108/t in March our view is that iron ore could trade down to $100/T or even lower in the months ahead which will pressure the Aussie lower.
In terms of Australia its major trading partner is China and despite frosty relations between Australia and China, Australian provides the biggest percentage of iron ore to china which we can see on the chart below:
Chinese Demand for Australian Iron Ore
China’s attempts to control outbreaks of Covid-19 have seen tough restrictions, which have of course have had an impact on economic output and have not been supportive for demand. The general view is that China’s demand for iron ore will increase now restrictions have been lifted but we don’t see much upside in iron ore and plenty of downside.
China is an export led economy and the global economy is slowing up quickly which is bearish for iron ore. The market generally is optimistic of the global economy avoiding a recession but this is unlikely in our view why? Because at the same time as we have global economic slow up the Fed and other central banks are raising interest rates to contain inflation.
“Global recession is coming. China (black), Germany (blue) & Japan (pink) are the world’s biggest exporters. New export orders in their manufacturing PMIs are tumbling, signaling weak global demand.” ( BofA)
China PMIs a leading indicator in terms of GDP have turned down and will fall further in the coming months.
The USD looks set to move higher as the Fed will be more Hawkish than the RBA and the USD historically does well against a background of a slowing global economy.
Technical Analysis
In terms of the key levels of support and resistance. We see AUD/USD as a sell on rallies back to 0.700 with a stop back behind 0.7100. If we move to new daily lows look to sell with a stop behind 0.700. On the monthly chart the target is 0.6500.
