Australia PPI And Commodity Situation

1 February, 2019

Overnight we had several bits of data released out of Australia which is an excellent opportunity to check up on what’s going on down under and what might be in store for their currency. Next week there is the monetary policy meeting of the RBA on Tuesday and the RBA monetary policy statement on Friday. We’re shaping up to have some volatility and the chance to make some good trades.

The recent data


HIA New Home sales: The month over month figure dropped 1.2%, to accumulate -5.6% compared to the prior year. This is the 16th straight decline, with all major cities except the capital registering lower prices. The press has been having a field day for the last several months over dropping housing prices – but this is after nearly a decade of steep growth that has pushed the ratio of house prices to income (the affordability index) to the highest in the world.

The housing price index came in negative during three consecutive quarters. The next installment (scheduled for mid-March) is expected to be at least as negative as Q3.

Producer Price Index: Came in lower than the prior reading (there were no estimates). Producer prices rose 2.0% over the preceding year, which is in line with inflation expectations.

The China problem


As everyone who trades the AUD pairs knows, China is Australia’s largest trade partner. A substantial part of the Australian economy is dependant on mining for resources that go primarily to the Asian giant. As China’s economic growth slows and switches to more domestic operations, this could have an impact on the AUD.

Along with the exports are capital flows from China, with a focus on real estate investment. The trade war between China and the US made it less popular for Chinese to offshore their capital. The PBOC is scheduling this month bond buying in Hong Kong, to prop up their currency.

However, while China’s economy is not growing as fast, there is still considerable demand. The American economy continues to expand, and commodity prices have been continuing to rise for the last two years. This keeps Australia’s terms of trade above 100 since the beginning of last year.

About the commodities


Australia’s chief export is iron ore, the price of which has been rising since Nov 28th of last year. It took a significant move to the upside following the dam disaster in Brazil. This forced the world’s largest iron ore producer Vale to shut down production. Since then, iron ore prices have shot up over 10%, and likely to remain high in the near term. Vale’s ore production would take some time to come back on line.


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