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Economists at ING Bank think iron ore may show fresh signs of weakness, which suggests AUD’s balance of risks may be tilted to the downside in the short-term. In the longer-run, the global reflation narrative and AUD’s undervaluation are set to be the prevailing factors and the AUD/USD pair may move above 0.80 even if iron ore prices decline. 

Key quotes

“After the policy shift by the RBA and given the risk of a further iron ore correction from current unsustainable levels, AUD appears more vulnerable than the other $-bloc currencies amid any possible setbacks in the global reflation story.”

“In the longer run, we still expect AUD to benefit from a risk-positive environment globally and from generalised USD weakness as the global recovery gathers pace. We remain confident about AUD/USD moving above 0.80 in the second half of the year.”

“In relative terms, the AUD may struggle to recover more ground to its closest peer NZD as the monetary policy differential looks likely to remain a factor, barring a surprising dovish shift and/or talk of FX intervention by the RBNZ. We think the balance of risks for AUD/NZD is tilted to the downside in the first half of this year, and we could see a move into the 1.05 region.”