AUD: Supportive conditions - AmpGFX

Greg Gibbs, Director at Amplifying Global FX Capital, suggests that the commodity prices have increased solidly for the AUD since lows around January which is likely to support the AUD in the medium-term.

Key Quotes

“The RBA minutes said, “Prices of Australia’s commodity exports had increased since the previous meeting and were around 30 per cent above the lows of early this year.”

Iron ore prices have been weaker in the last month or so, but coal prices have continued to trend higher.  In fact, metallurgic coal prices have surged by more than double since around mid-year to levels consistent with the peak years (4 to 5 years ago).  This may be a spike above longer-term sustainable levels related to production disruptions in China.  However, China has also been closing down less efficient mines, and the rise in coal prices are generating a surprise lift to income from Australian producers.

The RBA minutes said, “Members noted that there had been some signs of an improvement in sentiment in parts of the mining industry.”

The emphasis of recent speeches by RBA Assistant Governor for Economic, Kent, and the RBA minutes is one of stabilization in the economy that is well advanced in working through the mining investment down-turn and growing at around trend. There appears to be little urgency to cut rates further.

Like New Zealand, if there was to be a rate cut it might be to lift inflation from levels that are below the target band.  But the RBA cut rates twice this year to deal with the lower inflation outcomes and appears willing now to take an extended period of time to assess domestic and global conditions; potentially well into next year.

At issue for Australia is a potential turning point in the housing market in the next year or two as a developing over-supply of apartments spills over to weaker house prices, a peak in housing construction, and potential for negative fallout for the financial system and household confidence.

However, at this point residential construction is still rising to a peak, house prices, overall nationally, are still rising moderately.  As such, it does not appear to be on the radar for AUD at this point.”