AUD/USD is up some 0.5% on the day and the pair have travelled from a low of 0.7372 to a high of 0.7426 as the commodity currencies continue to top the forex leader boards on a daily basis. Commodities are strong with the CRB index moving to fresh cycle highs on the day in what has been a monumental rally since April 2020. AUD, in particular, is enjoying a comeback in iron ore prices with a fresh corrective high made at the start of the week.
However, the Evergrande crisis is a dark cloud hanging over the Australian economy and its reliance on its biggest export, iron ore. Prices sat just over $US120 ($164) per tonne of 62 per cent at the end of last week, well below the prices reached in mid-July this year, when they topped $US200 per tonne. Considering the Chinese property shake-out, the fastest and largest iron ore crash in history would be expected to resume its southerly trajectory. UBS estimates there are 10 developers with potentially risky positions with combined contract sales of 1.86tn yuan – or 2.7 times Evergrande’s size. In other words, Evergrande is only the tip of the iceberg.
Chinese construction is likely to fall over the next year and that would be expected to equate to hundreds of millions of tonnes of less steel that will be needed. This would equate to hundreds of million tonnes of iron ore equivalent also. This puts iron ore on track to fall below $100 a tonne and perhaps to even match its 2015 price crash to somewhere below $50 in the near future and weigh heavily on AUD.
Meanwhile, the US dollar edged down against major peers on Thursday, touching a 10-day low as rising risk appetite and profit-taking ensued at the same time. Producer price growth slowed in September to the lowest level this year as airline passenger service costs plunged. The seasonally adjusted producer price index rose 0.5%, compared with a 0.7% gain in August, the Bureau of Labor Statistics said Thursday. The latest print was the lowest since December and came in line with the consensus on Econoday.
Nevertheless, there are expectations that the US Federal Reserve is going to tighten monetary policy more quickly than previously expected amid an improving economy and surging inflation that had fuelled a rise in the greenback since early September. The minutes of the Fed’s September meeting was more hawkish than expected and have confirmed the tapering of stimulus is likely to start as soon as November. The dollar index is back to being flat at the time of writing at 93.999. However, it had met its lowest since Oct 5 at 93.759. On Tuesday this week, it had reached a one-year high at 94.563.
The price is meeting a familiar level on the weekly chart of Sep 2020 which could prove to as resistance and send the pair back to test what is now a counter trendline. A break of the highs, however, will bring in the Sep tweezer top near 0.7480 which guards a full-on breakout to the upside. The market will otherwise be bearish below 0.7220.