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Iron Ore Prices Keep Rising, But What About AUDUSD?

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Yesterday, iron ore prices topped another 6-month high, harkening back to when there was broad speculation of a commodities supercycle.

This came a little ahead of the latest monthly traffic report from Hedland Port, the largest iron ore export port in Australia. It showed that there was a slight drop in exports during January to 48Mt from 50Mt in the prior month. Despite being lower, it is still at the top of the normal range.

The suggestion is that Chinese demand for raw materials, and in particular Australia’s largest export, remains robust. We should remember that last year there was concern that China would be cutting back on its iron ore imports after it cut down on electric smelting in a bid to phase out more polluting energy production.

Export figures show that fear hasn’t been borne out. And prices have been creeping higher as China’s regulators look to support the economy with easier monetary policy.

But that doesn’t mean everyone is happy

Following the news, China’s NDRC – which controls the economy and has plenary power over imports – announced it would enhance inspection tours of the iron ore market. This isn’t entirely surprising, as China has taken similar measures the last time iron ore broke above the $150/ton level.

A slight drop in Australian mining stocks and in the currency followed this move. However, the regulator’s move has not stopped commodity prices from moving significantly higher. And this is supporting the Aussie economy.

What about the Australian dollar?

At current rates, iron ore represents over half the total value of Australia’s exports, and therefore a major contributor to the country’s current account.

The well-known global logistics problems have been primarily affecting container ships. Booking shipping, of the type used to carry iron ore and coal from Australia, has not had similar difficulties.

The domestic situation for Australia relating to omicron continues to improve. But, by comparison, China has been struggling to contain the much more transmissible variant. Their policy of rolling lockdowns could have sudden impacts on the price of commodities and by extension the AUDUSD.

Where things can happen

For example, a few days ago a lockdown in the southern city of Baise sent aluminum prices to a multi-year high because certain processing facilities are concentrated in specific areas. Hubei province – the capital of which is Wuhan – is the largest steel production area. Panzhihua is another major steel-producing city that could affect markets if it were subject to a rolling lockdown. The third-largest steel-producing city in China is Anshan, the capital of the Liaoning province, which had rising cases over the last few days.

In general, the global economic recovery and high inflation could support commodity prices in the medium term. But the potential shocks from omicron aren’t completely gone yet. So the trajectory of the Aussie could still be shaky as it continues to respond to commodity prices.

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