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AUD surges higher

Published January 31, 2019

by Nicholas Cork

AUD has had a solid 24 hours after initially gaining support from yesterday’s CPI data which showed a better than expected headline inflation number, largely from contributions  from the 9.4% increase in tobacco prices and a 6.2% lift in domestic airfares, and offset slightly by a 2.5% fall in petrol prices. Note the YoY number is still below the RBA’s targeted inflation band of 2% – 3%, but the AUD rate cut talk has eased in the market for now as it did for the NZD last week.

Afternoon news that Brazil’s Vale have announced iron ore production cuts as a result of the mine dam disaster saw a 8% spike in iron ore prices and a further rally in the AUD back to 72 cents.  The Vale news is a significant bonus for BHP, RIO and FORTESCUE, let alone Australian exports as a whole, as Vale has said it would take up to 10 percent of its output offline, a move that would cut up to 40 million tonnes of iron ore production a year and dethrone them as the no 1 supplier of sea-borne iron ore, likely to be replaced by RIO.

The next boost came from the US FOMC leaving rates unchanged as expected, but also saying it would be patient in lifting borrowing costs further this year as it pointed to rising uncertainty about the U.S. economic outlook. Language removed from previous accompanying statements were around the US economy being ‘roughly balanced’ and ‘some further’ rate hikes would be appropriate in 2019.  What seems to be quite important is that in a separate release from its policy statement, the U.S. central bank also said that while it was continuing its monthly balance sheet reduction,  it was prepared to alter the pace “in light of economic and financial developments” in the future, which leaves the market guessing do they see something ahead that is good or bad?  Equity traders could only see the good though and the DOW has closed up 434 points to give regional equities quite a firm footing to start today.

Brexit appears to be falling further into the ‘too hard basket’ now as Brussels had already telegraphed they had no more to negotiate on a month ago, yet Britain’s parliament has demanded that Prime Minister Theresa May renegotiate a Brexit divorce deal that the other members of the European Union say they will not reopen –  all sounding too Monty Pythonesque for my liking and surely some disaster must lie ahead to check against  the soaring GBP…. 

So today the AUD begins the day at 8 week highs near 0.7250, almost 2 cents higher than earlier this week,  giving importers a chance to look at their exposures whilst the AUD is at elevated levels in comparison to the last 2 months.

Good luck

IRON ORE vs AUDUSD (back in sync)     REUTERS