Deutsche has some models to explore.
Despite a raft of bad China news, iron ore prices are proving resilient. They’re actually up year-on-year, despite no obvious improvement in property activity (the biggest driver of steel demand) (Figure 1). Iron ore has been holding above $100/t in recent months, and even got up to $110/t in the past two weeks. That’s a big deal for Australia, with iron ore accounting for almost one-fifth of total exports, and 5% of GDP. As a result, AUD/USD has long been closely tied to the fortunes of iron ore (Figure 2).
AUD has undershot that relationship recently. That may reflect selling pressure on AUD as super funds normalise their hedge ratios given global risk concerns. Or perhaps the AUD is anticipating a fall in iron ore, given the FX market is far more liquid than the iron ore market (which has a high physical component). We take a look at a couple of simple models to assess iron ore drivers.
