AUD: Fair value estimates tilting higher supported by coal - Westpac

Sean Callow, Research Analyst at Westpac, notes that the price of coal used for steel-making has surged 260% since end-May as the reduced output from Chinese mines and a pickup in residential construction have sparked the gains.

Key Quotes

“The rise in thermal coal used for generation of power and heat has been far less spectacular. Any reversal could be dramatic. But for the time being, this is a clear positive for Australia’s economy (including the projections in the mid-year budget update due before year-end). Importantly, sharply higher prices are now being locked into contracts, notably with Japan.

Coal has been the sharpest mover in Australia’s export basket recently but by no means alone as the basket reaches highs since Nov 2014. This keeps AUD/USD fair value estimates tilting higher. Yet any AUD gains near term may have to be focused on cross rates rather than against USD. At time of writing, the dollar has risen against all G10 currencies over the past week, ranging from 0.5% (CAD and JPY) to 3.6% (the flash-crashing pound).

The US dollar’s strength is impressive given the rather lukewarm Sep payrolls data. Fed officials continue to make the case for higher rates, helping pricing for a 14 Dec hike to 57%, a 2016 high. Political uncertainty remains in both the US and Europe, in a traditionally volatile month for equities. Global nerves seem likely to persist, capping AUD/USD but probably causing more damage to the likes of NZD, GBP and EUR, where further monetary easing remains probable.”