Commodities boom outpaces Australian dollar
“But what we’ve seen recently is a big supply story…prices have been kept much higher than they would have been due to supply issues…more recently we’re seeing this ESG story and a chronic underinvestment in coal and gas. The high prices we see are more related to supply than demand, which means it’s less positive for the currency.
Bromhead attributed the long-term decoupling to three reasons: a lack of new investment, wealth moving overseas and shifting budget priorities.
First, he said the mining boom was closely linked to rising commodity prices and new investment in the sector. This, in turn, used a lot of labor and raised wages, tightening the economy and putting pressure on rates. However, new investments have plummeted.
“We had this unprecedented level of capacity expansion during the mining boom…all the projects were built, so what’s happening now is we don’t have the same mining investment responsiveness changes in commodity prices,” he said.
“If you look at a line of Australian mining investment, it has done next to nothing as commodity prices have soared.”
Second, Mr. Bromhead points to the wealth and revenue generated by mining projects being moved offshore. “About three-quarters or more of the revenue and wealth we generate through these mining projects goes offshore,” he said.
“Generally one of the benefits you would see is that when the BHPs and the Rios make all that money, that dividend stream would go into the pockets of Australians who can go and spend it. It’s been diminished because that dividend stream … does not enter into the balances of retirement pensions.
Finally, Mr. Bromhead underlined a change in budgetary priorities. He notes a shift from mining boom taxes spent on baby bonuses and big tax cuts for Australian businesses to governments tightening their belts to limit the deficit as Australia recovers from the COVID-19 pandemic.
The Australian dollar lost 6.4% in August against the US dollar as the central bank’s aggressive rate hike and slowing growth in China put it on track for a 1.6 month loss %. The Aussie has lost US4¢ so far this year.
Meanwhile, the DXY US Dollar Index is expected to post a 2.6% gain this month, after hitting a 20-year high this week.
The ANZ expects the Australian dollar to regain ground by December, hitting US70¢. However, he says the high value of the US dollar is putting currencies around the world under the pump.
“Clearly the G10 FX is currently the flip side of the US dollar coin…it’s a US dollar index story, it’s a dollar destruction story, it destroys everything in its path,” he said. said Mr. Bromhead.
NAB head of FX strategy Ray Attrill believes the Australian dollar is “bogged in the US65¢ to US70¢ range” through the end of the year, and will test the low of this fork.
As the Aussie dollar tests new lows, Bromhead says there are benefits for Australian miners, especially gold miners, with US dollar balance sheets.
“If you’re BHP, you can sell your iron ore in USD, but pay your shareholders and operating expenses in AUD,” he said. “The lower the AUD goes, the more AUD you earn.”