After hitting a US 55-cent low in March, the Aussie dollar is fighting back.
Since then, the AUD has climbed back up to 69 US cents, or over 25%. It’s also clawed its way up from 52 EU cents to close to 62 EU cents against the Euro today.
Still, in the case of the US dollar, this is 1.17% lower than at the beginning of the year and a long way away from the 81 US cents it was trading at in January 2018.
One of the reasons for the Aussie dollar come back is that the US dollar is weakening. The US dollar Index, which keeps track of the value of the US dollar against a basket of currencies, has lost close to 2.5% since the end of May.
It’s also helping the fact that the Reserve Bank of Australia left rates untouched yesterday at 0.25%. This is higher than the 0% interest rate offered by the European Central Bank and the same as the funds rate in the US.
Yet the more likely reason why the Aussie dollar is climbing is that it’s starting to move on higher iron ore prices.
Is iron ore back?
Iron ore prices have raised above US$100 per tonne after Vale, the Brazilian iron ore producer, had its production affected by coronavirus. Australia is the largest iron ore exporting country in the world, followed by Brazil.
As the Australian Financial Review (AFR) reported, Vale is struggling to contain the spread of the virus:
‘Vale told The Australian Financial Review on Tuesday that it was sending home not only those workers that tested positive to the virus, but also anyone who had come into contact with an infected worker.
‘While BHP, Fortescue and Rio Tinto benefit from extremely low infection rates in Western Australia’s iron ore heartland, Vale had to rely on a court injunction on Friday to keep its Itabira mining hub open.
‘The injunction was required after a branch of Brazil’s federal Ministry of Economy sought to shut the Itabira hub over what it believed to be a surging rate of infections.
‘The Itabira complex produced almost 36 million tonnes, or 12 per cent of Vale’s total iron ore output in 2019, and the closure attempt fuelled perceptions that iron ore supply from Brazil will be weak in a year when Chinese steel production is on track to set a new record high.’
Iron ore prices spiked last year too after a Vale-owned dam burst in Brazil, killing hundreds of people and causing the closure of several mines. The shortage in production affected supply, pushing iron ore prices up then too.
What could happen next?
It remains to be seen if the Aussie dollar will keep gaining against the US dollar.
Much of it will depend on how demand for iron ore from China continues to evolve, as tensions between the US and China continue and global economic growth slows. China is the largest importer of iron ore, with a 65% share of all of the world’s imports.
It will also depend on the yuan. A weaker yuan would make iron ore imports more expensive.
Iron ore prices may be in for a run for now, but for how long?
Check out our ‘Aussie Iron Ore Crash 2020’ where Lachlann Tierney explains why we could see lower iron ore prices, and offers three alternative resource investments.
To download this free report, click here.