The Australian dollar is unlikely to follow falling iron ore prices

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The Aussie dollar is likely to remain resilient in the face of falling iron ore prices, ANZ says.

Prices for iron ore benchmark 62% fines crashed by another 5% overnight. That took losses over the previous six sessions to 13.7%, amid market speculation that Chinese steelmakers are curbing production.

Business Insider’s David Scutt also noted this morning that the September price action looks like a similar pattern to falls in June, when Chinese steel producers prioritised paying off quarterly debts.

Despite the drop, ANZ analysts Daniel Been and Giulia Lavinia Specchia said that the falls only present limited downside risk for the Aussie.

For starters, they noted that the recent correlation between iron ore prices and the AUD/USD exchange rate is below it’s long-term average.

In addition, “the low correlation between the AUD and the price of iron ore is not uncommon, meaning that this loose relationship may last for some time,” they said.

The historical tendency for the correlation to weaken is shown here:

Furthermore — and despite the price action which has seen benchmark 62% fines tumble to $66 a tonne — the two analysts said that ANZ doesn’t expect further falls from here.

“Our commodity strategist is not bearish on the medium-term outlook and expects iron ore prices to stabilise around the mid-sixties over the medium-term,” they said.

Using ANZ’s short-term pricing model, the pair said that a fall to the mid-$60 a tonne price range would only see the Aussie lose around 2 cents against the US dollar from its current level.

Overnight there was certainly a pickup in AUD volatility, as the currency fell by more than 1% from its recent range above US80 cents.

The plunge in iron ore would likely have contributed to that, along with falls in base metals prices and the market’s slightly dovish interpretation or RBA governor Philip Lowe’s speech yesterday.

But Been and Specchia don’t think that’s a sign of things to come.

“While moves in iron ore may drive some near-term volatility in the AUD, we don’t expect the impact to be large or persistent.”

Instead, the pair expect the global macroeconomic backdrop to remain broadly positive for the AUD.

They said the global growth outlook is steadily strengthening, and also noted that the future direction of interest rate moves in Australia is now leaning to the upside.

Earlier this week, ANZ upped its forecasts and said it now expects the Reserve Bank of Australia to raise rates twice next year.

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