Aussie Turns Weak on Gloomy Iron Ore Price Forecast

Aussie Turns Weak on Gloomy Iron Ore Price Forecast
March 15, 2017

The uptrend in the price of coking coal and better than anticipated job additions turned the Aussie bullish against the Canadian dollar, which is under pressure from the sharp drop in the price of crude oil. The Reserve Bank of Australia’s optimistic view of the economy also aided the AUDCAD pair to remain bullish and trade near 1.0200 levels. However, the price outlook of iron ore indicates the possibility of a bearish reversal in the AUDCAD pair.

Last week, the price of crude oil fell below $50 per barrel for the first time in 2017. The rise in the rig count and record high inventories in the US paved way for the collapse of the crude oil, below the psychological level of $50 per barrel. However, it should be noted that an agreement between OPEC and other oil producing nations, limiting production to $32.5 million barrels per day, is already in force. Before the agreement was signed, the daily production was about 33.8 million barrels and the crude was trading near $48 per barrel. Now, a rise in the rig count does not offset the entire cut in the production. Thus, we can safely argue that the crude price will not move further southwards. Such a scenario would favour Canada, as the export of crude accounts for nearly 4% of the country’s GDP.

The impressive job additions of 15,300 in February, overwhelmingly exceeding analysts’ expectation of mere 600 job additions, are also supporting the rise of the Canadian dollar in the short-term.

On the contrary, the iron ore price is expected to decline to a low of about $50 per ton, according to research firm Capital Economics. Such a scenario would result in a steep decline in revenue earned by the government of Australia in the form of taxes. The price of iron ore had already fallen by about $10 to $88 per ton in the past ten days.

There is another notable development in the Chinese iron ore imports, which is not good news for Australia. The Chinese mills are increasing their quantum of iron ore imports from Brazil, while decreasing from Australia. In 2016, Chinese imports from Brazil increased to 22%, from the prior 17%. On the other hand, imports from Australia decreased to 51%, from the prior 55%. The superior quality of Brazilian iron ore is the main reason for the shift. Thus, fundamentally, we can anticipate the hard economic data to create a downtrend in the AUDCAD pair later this week.

The AUDCAD pair is facing resistance from sellers at 1.0190 levels. The declining MACD histogram indicates a loss of momentum. So, technically, there exists a high probability of a decline.

AUDCAD - Technical Analysis - 15th March 2017

To trade the probable downtrend, a Forex trader can open a short position in the AUDCAD pair near 1.0190, with a stop loss order above 1.0265. The position can be covered near 1.0070.

Likewise, a put option would be the best instrument to trade the possible decline in a binary market. Choosing an expiry period of one week and entering the trade before the pair declines below 1.0180 would place the trader at an advantage.



Sammy is our forex expert, with over 20 years experience in the financial sector, she will be keeping you up to date with the ups and downs of currencies around the world

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