Australian Dollar, AUD/USD, China, RBA, Fed,Yields – Fourth Quarter Fundamental Forecast
- Australian Dollar[1] depreciated against the US Dollar[2] to finish Q3
- The bad news may be priced into AUD/USD[3] but that could change in Q4
- Commodities, USD[4], yield-spreads, Delta and China may all play a role
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Q3 Recap – AUD/USD Consolidates
The Australian Dollar made a new low for the year in the third quarter. Reasons for the weakness include the collapse in the iron ore price and other commodities,China uncertainty, the spread of the Delta variant of Covid-19, US Dollar strength and interest rate differentials, among other factors.
China’s Shared Prosperity Policy Continues to Impact
The Chinese Communist Party (CCP) have stipulated that the Chinese steel mills must produce less steel in the second half of 2021 than was produced in the second half of 2020. Although the iron ore price is considerably lower than the lofty heights seen earlier in the year, it is still near the highs seen through 2020. There is scope for the price to fall further but perhaps not much further.
An iron ore price near 70-80 USD a tonne changes the dynamic as other producers become unprofitable near those levels. This creates a potential floor on the price of iron ore. Australian miners have a 20 USD per tonne cost base, which is hard to replicate because of the scale of the infrastructure required.
China have cracked down on various sectors of the economy and are likely to continue to do so as they implement their ‘shared prosperity’ policy. This has the potential to de-rail confidence and risk appetite
