Copper costs now have a greater influence on the Australian dollar than iron ore, as base steel is seen as an indicator of economic growth, especially in China.
Copper costs rose last week to an 11-month high on fears of a shortage of sources after Chinese smelters, which process some of the world’s mined copper, agreed to cut production to cope with falling processing rates.
The Erdenet copper mine in Mongolia. La China is the importer of copper. Bloomberg
The three-month benchmark value price on the London Metal Exchange has risen above $8,950 per metric ton since April. It was last trading at $8,786 per tonne.
This came after China’s biggest smelters, the world’s largest manufacturer and customer of fine metals, met in Beijing and agreed to a symbolic relief in their loss-making production.
“The Australian [dollar] will be very sensitive to iron ore costs because iron ore is still by far our biggest export, although it hasn’t been in the last six months,” said Tim Baker, head of macroeconomic research at Deutsche Bank.
Treasurer Jim Chalmers also warned that lower iron ore prices would put pressure on the federal government’s budget. He noted that the Australian dollar had been more responsive to copper, although Australia is not a primary exporter of the metal.
Rodrigo Catril, senior currency strategist at National Australia Bank, echoed this sentiment: “The Australian dollar tends to have a stronger and stronger relationship with copper, which tends to be a smart barometer of global expansion and production activity. “
The copper market had already been shaken after First Quantum Minerals shut down its expired Cobre Panama last year and Anglo American and Codelco cut their full-year forecasts.
Still, Catril said gains in the Australian dollar could be limited.
“Commodities are a sign of global activity and if they’re rising, that’s good news when it comes to demand-driven value accumulation. But that’s not necessarily the case when it comes to a buildup caused by a source shock. “he said.
The Australian dollar, which is seen as a bellwether for Chinese expansion because of the close industrial ties between the two countries, is down just about 3% this year, partly due to unfavorable interest rate differentials between the United States and Australia.
Australian government bonds have traditionally presented more complicated conditions than their U. S. counterparts because they are less liquid. There are $27 trillion in U. S. Treasuries outstanding, compared to $921 billion for the Commonwealth.
But since the COVID-19 pandemic and the big stimulus injected into the global economy, the spread between Australian and US bonds has been negative. The yield on the 10-year Commonwealth bond is 4. 07 percent compared to 4. 19 percent in the United States. States.
And when the spread is negative, history shows that the Australian dollar struggles to reach 70 cents, he said. Still, he believes the difference is about to turn positive.
“We expect that spread to continue and when you look at the genuine credit spreads, they tell us it’s very likely to happen. “
Deutsche Bank’s Baker predicted that the unfavorable yield spread would disappear by 2026 as mining capital spending shows signs of life. When the resource sector grows, it leads to more powerful growth. “It will take time for Australia to return to positive credit spreads. “”It’s a big shipment to the right when we’ve made so little investment for seven or eight years. A strong year doesn’t replace anything,” he said.
National Australia Bank and Deutsche Bank expect the Australian dollar to reach 70 cents this year.
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