The Increasing Influence of Commodity Prices
Iron ore’s drop below US$100/tonne comes at vulnerable time for the Australian dollar, and this reinforces our bearish convictions on the currency. Commodity prices last sank to these levels 18 months ago. Back then the FX consequences were muted (Figure 1), but on this occasion things are likely to play out differently. Simply put, the temporary forces that allowed the currency to ‘forget’ its commodity roots in the past have faded.
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