Iron Ore, Natural Gas Price Rally Strengthens the Aussie

Iron Ore, Natural Gas Price Rally Strengthens the Aussie
July 15, 2019

 

The Aussie strengthened against the greenback on Friday despite unimpressive Chinese trade data, mainly due to a rally in the price of commodities such as iron ore and natural gas. Notably, iron ore, coking coal, and natural gas are the top three export commodities of Australia. Specifically, Australia has become the largest exporter of natural gas, pushing Qatar to the second place.

China is the biggest trading partner of Australia. Therefore, strong economic data from China usually spurs the Aussie. However, the trade data released Friday was not impressive, even though it surpassed analysts’ expectations. Data from the General Administration of Customs indicated that China’s exports did not decline as much anticipated in June, resulting in a bigger trade surplus compared to the earlier month.

Exports declined 1.3% on y-o-y basis in June, a notch below the 1.4% drop anticipated by economists. During the same period, imports slumped 7.3% y-o-y, versus analysts forecast of 4.6% decline. Due to the steep fall in imports, China’s trade balance increased to $50.98 billion in June, an increase from $41.73 billion in the earlier month and $40.91 billion in the prior-year period, attaining the highest level since December of 2018. The reported trade surplus was also higher than analysts’ estimate of $44.65 billion. Still, the data was not cheered by the market as it reflected a quicker decline in imports, compared to exports.

The data also revealed that the US-China trade war had an impact on China’s economy, but did not bring down the US trade deficit with China as intended by the White House. China’s surplus with the US rose by 11% as exports fell 7.8%, while imports plunged 31.4%.

Despite the unimpressive trade data, the Aussie managed to strengthen due to iron ore and natural gas rally. Iron ore, the raw material for the steel industry, hit a yearly high of $126.35 per ton, up from $73 in January 2019 and highest since January 2014, as per data provided by S&P Global Platts. The Brazil dam collapse in January and weather-related setbacks in Australia created a supply squeeze, resulting in iron ore price rally.

Notably, Chinese steel output has increased by 10% in the first five months of 2019, versus a year ago.  The US production grew 6.2%. Iron ore stockpiles at Chinese ports are shrinking quickly, and some analysts believe that prices could rise further if inventories decline. Currently, stockpiles at China ports stand at 115 million tons, which can feed the mills for less than four weeks. As the time taken by shipments to arrive from Australia to Brazil is almost the same, analysts believe that iron ore price may go up further.

In a recent note, Citigroup said: “The last time we got to 3 weeks of cover, iron-ore prices ran to $140 a ton.”

Australia also supplied more than 53% of China’s natural gas (LNG) imports in the first five months of 2019, according to data provided by Refinitiv. In 2016, Australia supplied nearly 40% of China’s LNG imports. The market share of Australia is expected to increase further with the recent commencement of Royal Dutch Shell’s new prelude facility. Natural gas August futures closed at $2.45 per MMBtu at NYMEX on Friday. Across the world, natural gas is being perceived as the cleanest fossil fuel. With emissions half that of coal, the volume of natural gas traded at European hubs increased 5% to 52,604 terawatt-hours in 2018, as per a report issued by Prospex Research Ltd. The price of LNG has appreciated by nearly 33% on a year-over-year basis. Therefore, we can expect Australia’s export of natural gas to increase further. The strong commodity prices indicate that the Aussie will remain bullish in the short-term.

Technically, the AUD/USD price chart indicates that the currency pair has found support at 0.7020 levels. The stochastic indicator is also ascending towards the bullish zone. Furthermore, the currency pair is also trading above its 50-day moving average. As a result, we can expect the AUD/USD pair to move up further.

AUD - technical analysis - 15th July 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.

Ian Maguire

Ian Maguire

Ian is our resident contributor to the latest going ons in the cryptomarket, keeping up to date with the latest icos and coins


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