Australia In Focus : Wallflower Days

Iron Ore Completes Fifth Weekly Loss as ‘Worst Is Yet to Come’

http://www.bloomberg.com/news/2014-11-21/iron-ore-heads-for-fifth-weekly-loss-on-global-glut-china-data.html

Dalian Iron Ore Price Chart

Dalian Iron Ore Price Chart

 

Again we have China coming to the rescue of the AUD dollar with Australia’s own central bank a bystander in the currency markets, as usual, noting that the PBOC rate cut announcement gave the AUDUSD a nice boost in the final trading day of the week but the AUDUSD failed to hold above the 0.87 mark.

This week's AUDUSD price action.

This week’s AUDUSD price action.

 

It’s wallflower days again for the AUD which harkens back to the days in 2005-2006 where it was not really going anywhere and the RBA was not doing anything much with their cash rate at 5.5%.

Bearing in mind that Australia is still beating economic expectations, coming second highest in the global Citi Economic Surprise Index, after MENA.

And that is the dilemma, because they are exporting iron ore and coal in higher quantities than ever which is good for the GDP albeit at lower profits which will be offset by a lower AUD (same case as the JPY where companies are more profitable because of a weaker currency).

It is a similar situation as Saudi Arabia, pumping more oil than ever to keep those GDP numbers up even as oil prices plummet.

In the long run, the big losses will come in investments as mines and oil fields halt investments to focus solely on production.

And thus, the outlook for the AUD remains dim and bonds should continue to perform as the probability of rate hikes diminish.

Bond yields in the 10Y and above tenors have fallen 1% and more, year to date and I think there is potentially more to go because 3.27% in the 10 year is still the highest we will get in the developed world with the exception of New Zealand and Greece.

AUD UPDATE

The China rate cut news will serve to shore up the currency in the short term, but demand for AUD carry is still anemic as evidenced in the massive slowing of bond issuance and the USD and EUR basis swaps trading at a 12 month high. Even Virgin Australia’s debut bond issue was in a 8.5% USD 5Y issue (which would benefit them if the AUD continues to weaken).

AUD crosses all suffered except for AUDJPY which suggests a reversal next week as we head into month end into the last leg of the year. I personally like the AUDCAD as well as the EURAUD pairs for the AUD to outperform against.

That’s about it, I guess.

Leaving you with the indicative bond prices.

aud bonds