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Barclays: China’s Housing Slowdown to Drag Australian Dollar Lower

Barclays FX research team have this week reaffirmed their view that the Australian dollar will trade in a flat or downward trend for the rest of this year. As of 2pm GMT on Tuesday, the currency was buying USD 0.792.

Barclays believe that markets are yet to price in the Australian dollar risk presented by China’s housing market slowdown, which will weigh on the price for iron ore – Australia’s largest export.

“We see China’s real estate slowdown weighing on Australia’s terms of trade and the AUD,” said Barclays. “The drag on AUD will be driven by China’s economic rebalancing away from investment and curbs on property speculation,” the bank added.

Measures to slow China’s property market were described by the country’s central bank, the People’s Bank of China, on August 11th. The bank said in its report on monetary policy that it would restrict credit to those buying property for speculation.

In their note to clients, Barclays also referenced the prevailing view among its commodities team that iron ore, of all industrial commodities, is most vulnerable to a slowdown in China’s housing market. Iron ore is inextricably linked to Chinese construction trends because more than 95% of the world’s iron ore is used to make steel, of which more than half is used in the construction of buildings, and because China accounts for nearly 70% of the world’s total iron ore imports.

Iron ore is also well known to drive trends in the Australian dollar, which is understandable given that sales of the commodity are vitally important to Australia’s national income.

As the price of iron ore tumbled between March and June from levels close to $90 per metric ton to $52 per ton, so did the Australian dollar, which fell from 0.755 against the US dollar to 0.733 within that period. To the relief of those holding AUD, since then, the currency has been revived for several reasons, one of those being the rally in iron ore back to the mid-$70s.

Despite recent signs for optimism, the medium and long-term outlook for iron ore remains gloomy. On top of Barclays’ downbeat assessment we can add those made by commodities hedge fund Academia Capital, who in June said that iron ore was “likely to weaken over the second half of 2017 and even more in 2018,” and Citi Bank, who recently predicted an average 2018 iron ore price of just $50 – less than the $55 the Australian Treasury say they need in order to lift Australia’s budget back into surplus territory by 2020-21.

Given the prospect for the Australian dollar to fall in the coming months in line with iron ore (should predictions for the commodity’s decline be accurate), and given the currency’s current high valuation (AUD remains close to long-term highs against several majors), readers in Australia with plans for travelling this year or for making overseas payments should consider changing or sending money sooner rather than later.

By buying foreign currency today, holders of Australian dollars can lock in current exchange rates, thereby positioning themselves ahead of any fall in AUD and maximizing their currency’s buying power.

To save considerable sums when changing money, always use BER’s comparison calculators for AUD travel cash and AUD foreign currency transfers. With today’s best value FX provider, you’d receive AUD 1,200 more than the Bureau de Change average when changing EUR 20,000 into Australian dollars.

Please note that the opinions of our authors are their own and do not reflect the opinion of Best Exchange Rates and should not be taken as a reference to buy or sell any financial product.

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