Commodity Hegemony Expected To Continue

Iron ore is under pressure, sinking as markets contemplate compressed profit margins at mills in China, while the unexpected CNY 78bn drain and talk of stock bubbles in China yesterday has added to the move. It should be noted that iron ore remains elevated on a historical basis.

• CBA says that it is metals, not central banks, that will dictate price action for AUD: "With interest rates on hold in Australia and the US this year, interest rate differentials will not be a major driver of AUD/USD. Commodity prices are the major driver of AUD/USD. Commodity prices are high and support further modest gains in AUD/USD. We expect AUD to break above 0.78 in coming weeks."
• The RBA meets next week. Bill Evans, Westpac Chief Economist, expects the bank to extend its QE programme. "If we are correct then the first extension will need to be announced by the April Board meeting," Evans said. "An earlier announcement at the February or March meetings is entirely possible but in general central banks are cautious, delaying decisions until the maximum amount of information is available"
• As a reminder, the RBA has stressed that "the Board will not increase the cash rate until actual inflation is sustainably within the 2 to 3 per cent target range. For this to occur, wages growth will have to be materially higher than it is currently. This will require significant gains in employment and a return to a tight labour market. Given the outlook, the Board is not expecting to increase the cash rate for at least 3 years. The Board will keep the size of the bond purchase program under review, particularly in light of the evolving outlook for jobs and inflation. The Board is prepared to do more if necessary."