AUD Decoupling from Commodity Prices - ANZ
(Australia - 19 June 2019) The Aussie dollar has long been considered a “commodity currency” given Australia’s major resources exports and primary source of income are metals, minerals and gas. But as the Australian Dollar (AUD) slides below US$0.70 at a time when iron ore prices have jumped to record highs above US$100/t, ANZ Bank economists suggest that connection no longer holds true. There are multiple mitigating factors behind the emerging disconnect.
The mining capex investment boom enjoyed by Australia over the past decade is coming to a close. While miners are making solid profits there is little incentive to invest in further growth. The growth phase has shifted into the production phase. The government may well be enjoying greater tax receipts from miners however much of the recently constructed mining and gas projects are importantly foreign-owned.
The RBA has just cut the cash rate to a new historic low of 1.25 percent, with more cuts expected, and the Aussie continues to fall in line with the central bank's dovish monetary policy stance. Generally commodity prices are determined by demand from Australia’s biggest trading partner – China. The Aussie should appreciate each time Beijing adds more economic stimulus which is happening now, and there’s suggestion of more to come, yet the Aussie has slipped under US$0.70 for the first time since 2008.
ANZ economists suggest increased Chinese stimulus can still provide for flow-through improvement in the Australian economy if it drives an increase in risk appetite. But the question is why Beijing sees the need for stimulus? The answer is the Chinese economy is slowing, as is the global economy.
The US Federal Reserve is widely expected to cut rates in H2 2019 which should lead to a weaker US dollar and as a result a stronger AUD. UBS economists in agreement with ANZ Bank’s assessment of the Aussie disconnect with commodity prices suggest in a world bracing for a trade war and resultant further slowing in global growth, the Aussie is not likely to find such support.