Mecardo Analysis - Forex-ample
- By: "Farm Tender" News
- Cattle News
- Jul 18, 2019
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By Andrew Whitelaw | Source: CME, Mecardo
Australia, the lucky country. We are a small country (53 in global ranking), with abundant resources. These resources from minerals to agricultural produce tend to be exported. There are years like last year where wheat exports will drop, but on the whole, we are an exporter. In this article we provide an example of the impact on wheat pricing.
As an export nation the exchange rate between the Australian dollar and the US dollar is extremely important.
Although many around the world are promoting a future of cryptocurrencies, the worlds trade is largely conducted in US dollars. This means that when our dollar rises against the dollar, our commodities can become less attractive (and vice versa).
I thought it would be interesting to look at what difference the dollar would make to the market at current rates. I have chosen a few zones highlighted below with the current 19/20 harvest price.
Adelaide ($291)
Geelong ($315)
Port Kembla ($353)
Kwinana ($300)
The present rate of exchange is 0.70¢, and in figure 1 the present price at differing exchange rates (0.65¢ & 0.75¢) is shown. The basis levels* have been kept the same, using todays Chicago futures price for December. As we can see the value of the contract increases as the Australian dollar decreases.
Every 1¢ move in the exchange rate equates to a A$4 move in price. Imagine the difference in price if we were still at parity (1:1) like in the early part of this decade.
Forecasts of the Australian dollar have a wide range, with banks predicting between 0.65¢ & 0.79¢ by this time next year. The reality is that forecasts are difficult to make, and a range of that size would have drastic impacts upon price.
At Mecardo we track a wide range of data points out with the agricultural sector due to the influence that they can have on our pricing. One of these data points is Iron ore pricing, as this is a primary driver of the dollar.
In figure 2, the quarterly price for Iron ore and the dollar. They both tend to follow very similar price movements and have a high degree of correlation. The correlation between both on a quarterly basis is 0.85, with 1 being a perfect correlation and 0 being no correlation.
In figure 2, during the past quarter iron ore prices has risen dramatically to prices not seen in recent years. If the dollar follows the typical correlation we would expect to see the Australian dollar advance, however it all depends on whether weakness in the wider economy can keep it anchored.
*There are some arguments that a large FX move would impact upon basis levels.
Key points
* Australia is an export dominated agricultural producer
* A 1¢ move in the dollar equates to a A$4 change in price.
* Iron ore is a driver of the Australian dollar, with rising prices the dollar has increased.
What does this mean?
A falling Australian dollar is beneficial for export pricing, as it makes our commodities more attractive on a global stage. At present the dollar is holding at its lowest levels in recent times, however rising Iron ore could prompt upward movements.
On the flipside the weaker dollar does make our input costs such as fertilizer, fuel and chemicals increase.
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