Australian dollar and Iron ore falling hand in hand

The price of Iron ore, Australia’s biggest export won’t be rebounding anytime soon and that’s a double edged sword for miners. Firstly, they will receive less income for the commodity and secondly as the declining price drags down the value of the Australian dollar the machinery needed for mining of which most is bought with foreign currency, will become more expensive.

Mark Pervan, head of commodity research at ANZ Bank mentioned that conditions are “quite challenging”, after speaking with representatives of Chinese steel mills and that, the supply of Iron ore to China has been “surprisingly inelastic”.

“China’s iron ore stockpiles remain high and its housing market is slowing at a time when the major Australian producers are ramping up supply,” he says. “There’s going to be no strong bounce above $US90 a tonne this year and there’s unlikely to be one next year either.”

Guest Post by Andrew Masters from FiboGroup

“About 50 per cent of the iron ore supply in China right now is not making money at $US80 a tonne, but many producers are being subsidized by the steel mills, about half of which are state-owned,” says Pervan.

The Australian sharemarket made a dramatic turnaround since falling to an eight-month low in the beginning of October. The All Ordinaries finished strongly on Friday up 0.9 % to 5,505 bringing the overall gains last month to 3%. Helping the Aussie market finish of the week in positive territory were some positive earnings from two of Australia’s largest banks. ANZ closed up 0.75 % higher to $33.50 after posting a yearly profit of $7.1 billion, which is an increase of 10% from the previous year. Macquarie Bank’s shares jumped 2.2 per cent after reporting a 35 per cent jump in profit for the previous six months after a recovery in wealth management. The Other major banks also finished significantly higher with the National Australia Bank up 35 cents to $34.99, Commonwealth Bank up 31 cents to $80.48 and Westpac jumped 32 cents to finish at   $34.78.

The Australian dollar was virtually unchanged last week finishing at US87.95 cents up from US 87.94 cents the previous week as poor economic data from the US and a slightly bullish tone from the Federal Reserve pushed the currency in both directions.

The latest US durable goods orders for September came in last Tuesday well below consensus at      -1.3% against the markets expectations of 0.5% and ending a recent string of positive economic news. The reading rattled investors and saw them bailing out of the dollar and into other currencies such as the Australian dollar. The poor performance also put another question mark about whether the US economy is really in recovery mode.

Pressuring the Aussie currency last Wednesday was the US Federal Reserve’s latest statement saying they were happy with the recent strength of the employment market and played down fears of low inflation and a slowdown in the global economy. The US has added a monthly average of 200,000 thousand jobs this year showing robust growth and from an employment side a stronger economy that is gathering momentum.

The Tone of the meeting lead investors to believe that the Central bank was more positive this time round and especially on the question of raising interest rates.

The Fed has kept to its word and decided to wind up its economic stimulus program at the end of October. The phasing out of the program began in January of this year by reducing the amount of purchases for treasuries and mortgage backed securities by $10 billion after each meeting.