Aussie Weakens On Sharp Drop In Iron Ore Prices

Aussie Weakens On Sharp Drop In Iron Ore Prices
June 6, 2019

 

The Aussie fell sharply yesterday after economic data from China, which is the largest trading partner of Australia, came in below expectations. Another reason for the Aussie’s sharp decline is that the yuan is approaching the seven mark against the greenback. This is a duplication of the scenario that played itself out in December of 2016. The Forex market is quite concerned about the yuan declining below seven versus the US dollar as it triggered substantial capital outflows from China last time. The overall market sentiment also turned bearish.

In May, China’s services activity recorded its slowest pace of growth in the past three months, mainly due to a sharp fall in exports. The heightened US-China trade war seems to have considerably affected the world’s second-largest economy. The Caixin Composite Purchasing Managers’ Index (PMI) stood at 51.5 in May, a decline from 52.7 in April. The market had forecast a reading of 52.4. A reading above 50 indicates expansion and vice-versa. The Caixin Services PMI came in at 52.7 last month, a decrease from 54.5 in April. The median estimate of analysts was 54. The weak PMI data triggered the Aussie sell-off.

Earlier today, the Australian Bureau of Statistics reported that the surplus on goods and services was $5.874 billion in March 2019, an increase of $676 million from the earlier month. In seasonally adjusted terms, the surplus on goods and services was $4.949 billion in March 2019, a decline of $191 million from the surplus in February 2019. Economists had anticipated a surplus of $5.15 billion.

The price of Iron ore, which is the numero uno export revenue earner for the country, dropped sharply below $100 per ton for the first time in the past two weeks. A decline in the price of steel and declining profit margin of the steel mill was the main reason for the sudden drop in the price of raw material. The spot price for benchmark 62% fines declined 2.4% to $99.12 per ton earlier this week. Notably, last week, iron ore touched a multi-year high of $108.62 per ton.

Coking coal prices also declined 2% to yuan 1,370. Coking coal, which is a raw material used in the steel industry, is the second major export commodity of Australia. The weak economic data, fall in commodity prices, and unresolved US-China trade tensions are expected to keep the currency pair bearish in the short-term.

Technically, the AUD/USD pair has fallen below its 50-day moving average after facing heavy resistance at 0.6990. Furthermore, the RSI indicator is having a reading below 50. As a result, we can expect the currency pair to move down and retest the support at 0.6910.

AUD - technical analysis - 6th June 2019

Disclaimer: Any financial trading analysis offered here is our opinion and is not intended as advice or direction for investors. We cannot guarantee the success of any trades made as a consequence of this article, and we encourage traders to incorporate a strong money management strategy to limit losses when they enter the markets. Please use this article as part of your own research before formulating strategies prior to trading.

Sammy

Sammy

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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