While there has been a significant decline in iron ore spot prices over the course of this year, AUD/USD has moved higher.
In our view while the terms of trade is an important driver of the currency over the long-run, over the short-run interest rates appear more important.
Indeed, we find evidence that moves in spot iron ore prices only impact the currency in the near-term if they are accompanied by shifts in interest rate differentials.
With the momentum in the domestic economy picking up, it therefore makes sense, in our view, for the AUD to have so far largely ignored the weakness in iron ore prices this year.
Poppycock is what I say to that conclusion. The current cyclical flush is about to run into a combined terms of trade shock and capex cliff. That’s going to be hard enough before we consider that house prices are near record highs and cannot be allowed to run much further, either.
Macroprudential is the only logical answer to control credit and cut rates for a lower dollar and a sustainable recovery.
David Llewellyn-Smith is Chief Strategist at the MB Fund and MB Super. David is the founding publisher and editor of MacroBusiness and was the founding publisher and global economy editor of The Diplomat, the Asia Pacific’s leading geo-politics and economics portal.
He is also a former gold trader and economic commentator at The Sydney Morning Herald, The Age, the ABC and Business Spectator. He is the co-author of The Great Crash of 2008 with Ross Garnaut and was the editor of the second Garnaut Climate Change Review.
Indeed, we find evidence that moves in spot iron ore prices only impact the currency in the near-term if they are accompanied by shifts in interest rate differentials.
