AUD GBP Kept Strong by Surging Chinese Iron Ore Imports despite Overall Trade Weakness
- AUD GBP boosted by Chinese imports – Iron ore demand strong
- Australian Dollar escapes Chinese headwinds – General Chinese trade data weakens
- BoE’s stimulus decision still weakening Pound – Barclays report suggests monetary stimulus losing effectiveness
- AUD GBP exchange rate forecast – Chinese inflation could soften Australian Dollar
Weak Chinese trade data may have caused market jitters yesterday, but strong iron ore imports protected the AUD GBP exchange rate from depreciating.
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Australian Dollar (AUD) Strengthens on Second-Highest Ever Chinese Iron Ore Imports Figures
The silver lining in yesterday’s Chinese trade figures was the iron ore imports data, suggesting that Australia’s trade with China will remain lucrative despite demand weakening on a more general basis. The overall trade balance for China did increase above expectations in July, but exports failed to shrink as far as forecast, ticking up from a decline of -4.8% to -4.4% instead of to -3.5% as predicted. The decline in imports continued to pick up pace against forecasts, accelerating from -8.4% to -12.5% instead of slowing to -7%.
The Australian Dollar escaped the weakening effect of this, however, thanks to the 8.3% on the month rise in iron ore imports. On the year, imports of iron ore climbed 2.7%. Recent low inventories of steel sparked a rally in Chinese steel prices of 31%, which has seen many producers increasing production and boosting demand for iron ore. The commodity has rallied 42% so far in 2016, helped higher in recent days by news that the Chinese government’s plans to curb steel capacity had failed to reach targets.
Argonaut Securities analyst Helen Lau commented;
‘I’m not really surprised because a lot of overseas suppliers wanted to increase their shipments to take advantage of the price recovery. Imports should stay around these levels in the next few months unless the price increases to $65 to $70 which should encourage domestic output.’
Lack of Domestic Data Keeps Pound (GBP) Weak as BoE Stimulus Continues to Weigh
With no domestic reports to provide support, the Pound weakened yesterday. Markets were still focussed upon last week’s ‘Super Thursday’ in which the Bank of England (BoE) went above and beyond expectations in providing post-Brexit monetary stimulus. The Monetary Policy Committee (MPC) delivered the expected interest rate cut, as well as an upping of quantitative easing to £435 billion and a £10 billion allocation for corporate bond purchases. Also announced was the creation of a new Term Funding Scheme, which encompassed £100 billion to help banks pass on the -0.25% interest rate cut to customers, allowing them to increase lending while remaining profitable.
The dragging effect of this on the Pound was heightened on Monday after Barclays released a report suggesting that, on a global scale, monetary policy was ‘reaching its limits’. In the report, analysts noted;
‘Since early June, central bank actions (and their anticipation) have driven down bond yields and flattened curves even further. The consequences have been strong flows into EM bonds, as investors are forced to search for yield, and continued pressure on bank assets, as investors fear for banks’ profitability in a “low for long” world. In particular, this adverse effect on banks suggests diminishing returns of continued monetary accommodation and possibly even a point of “reversal”, i.e., where its effects could become contractionary as bank lending tightens as a result.’
Investors continued to turn away from the Pound on Monday, pushing the FTSE 100 to a 14-month high. In forex, the Pound weakened -0.3% against the Australian Dollar (GBP AUD), -0.2% against the Euro (GBP EUR) and -0.1% against the US Dollar (GBP USD).
Australian Dollar Pound (AUD GBP) Exchange Rate Forecast; Chinese Inflation Data could Weaken ‘Aussie’
While yesterday’s data contained a ray of hope for Australian iron ore exporters, keeping the Australian Dollar strong, a weakening in today’s Chinese consumer price index could undermine the recent AUD GBP gains. Inflation is forecast to have ticked lower in July, softening to 1.8% from 1.9%. Domestically, the ANZ Roy Morgan Weekly Consumer Confidence Index and the NAB Business Confidence survey results could generate some ‘Aussie’ movement.
The UK is set to release a pre-Brexit data slew, encompassing industrial and manufacturing production and trade figures for June. The Pound could be facing depreciation regardless of whether the results show strengthening or weakening in the index; investors largely react dovishly to negative data, but the recent figures showing firming in GDP before the referendum also caused a Pound decline.
AUD GBP Conversion Rates
The Australian Dollar Pound (AUD GBP) conversion rate was trending around 0.5845, while the Pound Australian Dollar (GBP AUD) conversion rate traded around 1.7113, during yesterday’s European session.