Iron ore market dynamics may hurt Aussie

Aussie dropped to 0.7595 in the recent session from the Monday’s opening price of 0.7680. The Reserve Bank of Australia released a neutral statement on Tuesday without even a partly hawkish tilt the market participants waited since the last week central bankers’ meeting.

We expect Aussie to slide even lower as there is a risk of iron ore prices falling lower in the longer term.

Iron ore futures were under pressure during almost three months, then, at the end of the second quarter, they managed to return into bull-market territory mainly on a surge driven by mills in China making additional purchases to replenish stockpiles, with high-quality ore in demand. They almost hit $65 level on June 29 which is the highest price since May 4. According to the Metal Bulletin Ltd., iron ore prices increased more than 20% from this year low of $53.36 posted just a couple of week ago.  

Daniel Gardwell, a leading economist at Australia & New Zealand Banking Group Ltd., explained the recent surge as follows: trading activity had increased significantly as buyers returned to the spot market after the long period of sitting on the sidelines.

Nevertheless, in the near term, some banks expect some weakness in iron ore futures given the surging supply. The top producers are expected to boost their exports 3.2% to 301 million tons this quarter, according to the estimates of Sanford C. Bernstein & Co.

Goldman Sachs Group Inc. says the price is heading lower and Citigroup Inc. sees it dropping to the $40s on the back of increased production, rising stockpiles, even if China’s steel production will hold at its current high levels in the upcoming months. Peter O’Connor, an analyst at Shaw & Partners, believes that iron ores prices will slide towards $55 by the end of this year that is iron ores’ marginal cost of production.