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Home›Iron Prices›AUD / USD may weaken on RBA, falling iron ore prices

AUD / USD may weaken on RBA, falling iron ore prices

By Brian D. Smith
May 29, 2021
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Fundamental Australian Dollar Forecast: Bearish

  • Australian dollar retreats despite general strength in equity markets
  • Weaker iron ore and copper prices could continue to work against the AUD
  • RBA may still hint at November 2024 bond moving yield target

The sentiment-linked Australian dollar fell last week against its major counterparts, struggling to capitalize on a rosy week for global equity markets. This despite significant gains in benchmark Chinese stock indices, where the Shanghai Composite index climbed 3.28%. The Australian dollar can sometimes behave as the primary liquid market proxy in China due to Australia’s commodity exports to the world’s second-largest economy.

The weakness of the Australian can be due to several reasons. The first is the decline in iron ore prices, with the Dalian Commodity Exchange (DCE) futures contract down more than 17% from May 12.e Peak. The second could be due to a drop in Australian 10-year government bond yields, indicating that markets may consider a slightly more accommodating RBA. This may be due to another temporary lockdown in Melbourne.

China, the world’s largest consumer of iron ore, has tried to cut steel production in an attempt to cut pollution. On top of that, the nation is trying to temper speculative asset bubbles. Whether or not the latter will prevail remains to be seen, but these efforts could also dampen the boom in metals like copper. This could continue to work against the favor of the Australian dollar.

The Reserve Bank of Australia is on top next week. No policy changes are expected, benchmark interest rates and the 3-year bond yield target should both remain at 0.10%. But, the central bank could insist it could reduce the bond target to the November 2024 bond at their July meeting. This may confirm the idea that the gradual reduction in policies may come later than expected.

It would also follow a rather disappointing local employment report for April, where Australia unexpectedly lost around 30,000 jobs. Markets will also be listening to the next US jobs report, due on Friday. Another strong beat for wage data could rekindle expectations sooner than expected, opening the door for global equity weakness. All things considered, this could be another disappointing week for the AUD.

Index of the Australian dollar against the yield of 10-year Wall Street and AU government bonds

Chart created using TradingView

— Written by Daniel Dubrovniksky, Strategist for DailyFX.com

To contact Daniel, use the comments section below or @ddubrovskyFX on Twitter

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