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Australian Dollar Turns Bullish on Upbeat Fiscal Outlook

The Australian dollar has turned bullish against the G10 currencies in December. In particular, the Aussie hit a one-and-a-half month high of 86.84 against the yen and a one month high of 0.7680 against the greenback. Following the poor current account and trade balance data reported by Statistics New Zealand yesterday, the Kiwi dollar fell to a one month low of 1.1010 against the Aussie. We expect the Australian dollar to strengthen against its rivals due to the facts provided below.

Earlier this week, the price of seaborne Fe 62% iron ore hit a two month high of $74.40 per ton, according to the data provided by The Steel Index. The price of iron ore, the largest export revenue earner of Australia, has remained volatile this year, ranging from $50 to $99. However, the 2017 average price of $70.60 is still higher than $56.60 in 2016.

Likewise, the price of coking coal, which is used by steel furnaces, is trading at an eight month high of $243.90. Since November, the price of coking coal has appreciated by 37%. The average traded price of coking coal in 2017 was $185.70, up $40 from the average traded price last year.

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The Aussie was also supported by an upbeat fiscal outlook issued by the government of Australia. During the mid-year budget update, Treasurer Scott Morrison stated that the deficit for the year to June 2018 is now expected to be about A$23.6 billion, instead of A$29.4 billion predicted in May. For FY18/19, the deficit is expected to narrow to A$20.5 billion. In the following year, the deficit is expected to shrink to A$2.6 billion.

Finally, in 2020/21, the government of Australia expects a surplus of A$10.2 billion. The upbeat outlook means Australia will most probably retain its AAA rating from S&P. In recent times, the country was on negative watch list of the international credit rating agency. Thus, economic data and fiscal outlook are expected to keep the Australian dollar bullish against its major rivals.


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