Economic Outlook: Australia

Demand of Iron ore

Australia heavily relies on its exports of iron ore to countries such as US and China. Iron ore is used for the manufacture of goods such as steel. Many were skeptical when mining company Rio Tinto routinely trotted out the view a few years back that China would produce 1 billion metric tons of crude steel by 2025-2030. When Chinese steel output seemed to go into reverse from 2014, the view was that Chinese steel consumption and output had peaked and it would spiral back down. Instead, things took off again in 2016, helped by some capacity reduction and a property construction boom. Bumper profits had incentivized Chinese mills to build new capacity and lift output of iron ore since 2017

In 2019, China produced 996 million metric tons of crude steel and this year the 1 billion metric tons mark will be breached. As it turned out, Rio Tinto were 5-10 years too late in their predictions. Platts expects Chinese steel production to keep growing at 1%-2% in the next couple of years. The demand side of iron ore will remain extremely strong - and it won't just be coming from China. The first quarter of iron ore exports to China will be slightly lower due to the Lunar New Year holidays when the Chinese markets will be closed for 2 weeks. But I would expect a stronger demand for iron ore over the next 2 quarters especially from China.

Pandemic Update and Outlook

After recently opening up a travel bubble between Australia and New Zealand, the Australian PM decided to ban travellers coming in from New Zealand after one COVID-19 case was detected in a traveller who travelled to Australia earlier in the week on 25th January 2021. Furthermore, the variant of the virus detected in the traveller was deemed to be more infectious than the original strain of the virus.

Some states in Australia had to shut down due to a recent rise in locally transmitted cases but the measures have been somewhat effective in curbing the locally transmitted cases among citizens at the expense of people travelling to different states in Australia.

However, there has been some positive news coming out of Australia and they have said that there have been traces of COVID-19 virus strains detected in water discharge facilities which indicates that there is progress to their progress to tackle the COVID-19 virus as people have been shedding the virus from their body through various ways. In the coming weeks, mayors and health authorities of different states will decide on how the rollout of the COVID-19 vaccine will take place. The travel bubble has also resumed as of 1st February 2021 which is a sign that things could be improving in the coming months with travellers from New Zealand able to travel to Australia without serving the 14-day quarantine.

RBA Monetary Policy Outlook

The Reserve Bank of Australia (RBA) decided to keep the cash rate unchanged at the all-time low of 0.10% and this is expected to remain at 0.10% for the upcoming meeting. Data suggests that the recovery is steady after the pandemic outbreak and subsequent economic crisis in Q2 2021, and recently announced vaccines could support the recovery ahead, although possible further outbreaks of the virus continue to pose downside risks (i.e., emergence of new strains of virus, problems in distribution of the vaccines to citizens, supply of vaccines from pharmaceutical companies).

Hence, the RBA still expects the recovery to be bumpy, which led it to maintain its extremely loose monetary policy stance to help the economy. This includes the purchase of government bonds in the secondary market, in order to lower financing costs and support credit supply. The December and January data were not helpful for the country as some states went into second lockdown due to a virus outbreak which drove Consumer sentiments down from 112 to 107.

The Bank is expected to maintain a dovish tone in the upcoming RBA monetary policy meeting, stating that it expects to maintain the cash rate at its current all-time low for at least three years, until the labour market returns to full employment and inflation rises sustainably within the 2.0%–3.0% target range. Moreover, it added that RBA could further ramp up the bond purchase program or take additional action if necessary, to ensure the 0.10% target rate for three-year government bonds is achieved.

In conclusion, for traders looking to trade the AUD pair be cautious about the RBA monetary policy decisions in the coming weeks to get a better understanding if the RBA is looking more hawkish or dovish as this is a major influence to the AUD pairs. Also, pay close attention to the COVID-19 related news as Australian states tend to take a very aggressive stance when it comes to detecting COVID-19 cases in their country as they may shutdown certain states to prevent further spread of the virus.

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