NAB: Iron ore and the Fed will drag the Aussie dollar lower

Photo: Douanes Francaises/Getty Images

Iron ore made a new cycle low last week as Dalian futures came under pressure.

In US dollar terms, that took the price of June 62% Fe, CFR China Swap Futures on the CME down to $56.79 a tonne.

That, according to the NAB’s Currency Strategy Team is “emblematic of ongoing downward pressure on Australia’s terms of trade”.

“So even if the currency has fallen in line with the decline in the terms of trade though 2014, further currency weakness will be warranted if key Australian commodity prices don’t quickly find a base,” it said.

But in the absence of any signs of a base forming in iron ore and as the major miners continue to increase iron ore production, the NAB says “any near term slippage further below $60 to pull the currency still lower and in fairly short order”.

The outlook is even darker for the Aussie dollar because of the FOMC meeting next week, “if, as seems likely, the Fed opts to remove the word ‘patient’ from its post-meeting communique”.

Equally, the NAB says the post-meeting press conference gives Janet Yellen a chance to set out the path of interest rates. A task that will be facilitated by the release of the FOMC members’ dot-point chart where they set out their individual expectations for rates.

This is likely to be skewed towards hikes after Friday night’s big non-farm payrolls.

All in all it means that the NAB sees little reason to revise its forecast of 76 cents by the end of this month or 75 cents by the end of June. But as a reminder of how important Fed rate hikes will be they add:

“Our modelling suggests that were the Funds Rate to end the year at 1%, the ‘fair value’ for the AUD all else equal would be around 0.73.”

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