Reduced Demand for Iron Ore Expected in 2018 – AUD Exchange Rates Tumble
The Australian Dollar to New Zealand Dollar (AUD/NZD) exchange rate continued its descent on Wednesday, falling on news that the Australian government expects iron ore prices to steady in 2018.
The government projection asserted that it expects iron ore prices to average $51.50 per tonne this year, a 20% drop from prices in 2017 as global supply rises and the Chinese steel sector shrinks.
This projection is at odds somewhat with the forecasts of UBS and Citi, both of whom claim that iron ore prices will remain surprisingly resilient.
The commodities outlook paper read:
‘The iron ore price is expected to experience some ongoing volatility in early 2018 as the market responds to uncertainty regarding the impact of winter production restrictions on iron ore demand’.
This is because China is in the process of closing various steel mills and induction furnaces in an effort to curb pollution and overcapacity within the sector – indeed, China’s President Xi Jinping has stated that fighting pollution is a key task through to 2020.
The prices for coking coal – another steel-making ingredient and key export from Australia – is also forecast by the department to fall over the next eighteen months.
Whilst AUD held its own against most of the majors despite this news, it quickly proved sufficient in limiting its upward potential against the New Zealand Dollar.
Surging Dairy Prices and Rate Hike Hopes Buoy New Zealand Dollar (NZD) Exchange Rates
New Zealand’s data calendar has been sparse lately, with demand for the New Zealand Dollar largely being driven by the recent surge in global dairy prices and the relative weakness of the US Dollar (USD).
Also lending support to NZD exchange rates is the expectation that the Reserve Bank of New Zealand (RBNZ) could raise interest rates in 2018 in reaction to the positive performance of the economy.
Inflation continues approaching the bank’s 2% target, with fiscal stimulus and new minimum wage laws being pushed through by the government also causing many to rethink their previous dovish interest rate predictions.
Richard Kelly, Head of Global Strategy at TD Securities, shared this sentiment, stating:
‘Significant upgrades to growth, low unemployment and forthcoming outsized fiscal spending all demand another hawkish tilt from RBNZ Governor Spencer’.
Whether this will successfully shift the current dovish outlook, however, remains to be seen.
On the US Dollar front, markets are responding to a report that China is considering trimming its purchases of American government debt, news that quickly curbed demand for USD and raised risk appetite once again.
AUD NZD Exchange Rate Forecast: NAB Business Confidence and Retail Sales Figures in the Spotlight
The Australian Dollar to New Zealand Dollar (AUD/NZD) exchange rate could grow increasingly volatile tomorrow depending on the outcome of two pertinent data releases; the Australian NAB business confidence reading for December, and the retail sales figures for November.
Australian business confidence is expected to rise during this period, with a forecast score of 10, up from the previous 6.
Retail sales, however, are expected to slow, with a forecast of 0.3% growth month-on-month, down from the previous print of 0.5%.
These mixed data prints could prolong the New Zealand Dollar’s lead, but if both readings prove positive then the Australian Dollar could recover losses.