Australian Dollar Outlook: Commodities Weigh on AUD/USD. Eyes on FOMC, RBA Minutes

AUTRALIAN DOLLAR FORECAST: BEARISH

• Chinese intentions on steel production drive iron ore prices and AUD/USD
• Energy commodities are facing supply chain issues as prices squeeze higher
• RBA minutes and FOMC ahead, can Australian bond yields rise to turn AUD?

The Australian Dollar continued to lose ground over the week as Australia lost more jobs than expected on Thursday. Australia’s main export commodity, iron ore, moved lower. This seemed to bear more influence than rising bond yields on the exchange rate.

Chinese government actions are likely to continue impacting iron ore prices as they work to implement their ‘shared prosperity’ policy. This includes reducing carbon emissions, which leads to a reduction in steel production being planned and less demand for iron ore. It is also likely to be influenced by the lack of supply of iron ore coming from Vale, Brazil. The country is not expected to be back at full capacity until the end of next year. Markets will be alert for changes in Chinese demand.

Energy commodities could see heightened volatility amid elevated prices due to

capacity concerns remaining in several key pockets of the global supply chain. Namely, the Mexican Gulf storm season, the English Channel power connection outage and shipping bottlenecks. The Baltic freight index is showing the cost of transporting energy commodities at the most expensive in 13 years.

Bond yields could play a role for AUD/USD going forward as the spread between Australian and US 10-year government bond yields continues to move towards parity. If Australian rates should move higher than US ones, traditional yield investors, which have previously been large buyers of Australian debt, may start returning into Australian fixed interest.

Looking ahead, central banks will be the focus for AUD/USD as the RBA will release their September monetary policy meeting minutes this Tuesday. On Wednesday, RBA Assistant Governor, Michel Bullock, will deliver a speech. Later in that day, the all-important FOMC meeting will take place and markets will be focused on the timing of any tapering. After a relatively benign US CPI print this week, expectations are low for any significant change of tact for the Fed.

AUD/USD AGAINST IRON ORE AND AUSTRALIA-US 10 YEAR GOVERNMENT BOND YIELD SPREAD

Chart created in TradingView

--- Written by Daniel McCarthy, Strategist for DailyFX.com

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