Australia: Terms of trade is expected to resume its gradual descent - NAB

Research Team at NAB, suggests that a relatively stable USD over much of the past quarter has meant that currency pressures have taken a back seat to supply-demand fundamentals in most commodity markets.

Key Quotes

“Uncertainty has lingered following the Brexit decision earlier in the year, but market volatility appears to have settled and economic indicators out of the UK and Euro have generally held up better than expected. While there are signs of stabilisation in areas of the world where economic activity has been weak, timely indicators of activity shown no clear evidence of a pickup in global growth momentum, while Chinese construction activity also appears to be slowing.

Supply disruptions (actual and anticipated) in some markets have been offsetting these headwinds, but most appear to be temporary in nature, suggesting recent price rallies will be short-lived. The NAB USD non-rural commodity price index is expected to fall by around 5½% in 2016, and a further 10% in 2017. The decline in 2016 is less than previously forecast, largely due to the unexpected rally in bulk commodity prices in the year to date. Given the anticipated USD appreciation, price declines will be marginally lower in AUD terms. NAB forecasts the AUD to bottom at around 68 US cents by mid 2018. Overall, the Australian terms of trade is expected to resume its gradual descent following a short-lived rise in the near term.”