AUD/USD: Iron ore, changed dynamics? - Nomura

Analysts at Nomura explained that the benchmark 62% ferrous content Port of Qingdao iron ore price, which tends to reflect prices received by Australian producers, is now up near its highest level since August 2014 (now US$92/tonne).

Key Quotes:

"Based on the sharp 2017 year-to-date rally, it is unsurprising that market participants are asking “how sustainable is the rally?” and/or “when could a price correction come through?”."

"In terms of the latter, as stated, we continue to think prices around current levels are unsustainable over the medium term. The mix of slower momentum in the Chinese property sector and downside regional Asian risks (see Asia Economic Monthly - AEJ manufacturing lags behind advanced economies, 9 February 2017), coupled with an ongoing incremental rise in supply from low-cost producers such as Australian and Brazil should be a headwind for iron ore prices later in the year."

"But at the same time, idiosyncratic developments on the demand-side point to prices remaining resilient and for any near-term price retracement to be gradual rather than a sharp decline. From an AUD perspective, this should continue to be a fundamental positive, especially as it is the level of commodity prices and the terms of trade rather than day-to-day price swings in prices that are important."

"Moreover, from an AUD-flow perspective, strong commodity export volume growth and higher prices mean Australia is now generating large monthly trade surpluses (December 2016 was a record A$3.5bn) (Figure 3). The run should translate into an improvement in Australia’s current account position, with the Q4 reading (released on 28 February) on track to post one of the smallest deficits since the mid-1970s."