A rally in the iron ore price to a one-and-a-half-year high of $US140 ($205) a tonne has pushed the Australian dollar to a fresh five-month high and puts Treasurer Jim Chalmers’ 2023-24 federal budget on course for an unexpected surplus.
On Wednesday, iron ore futures in Singapore soared to US$140.45 a tonne for the January contract, concurrently elevating the Australian dollar to US68.26¢. BHP (ASX:BHP)'s shares also reached a historic high of $50.60 during the trading session. This surge arrives as the mid-year budget update, released by Dr Chalmers in December, indicated a minor $1.1 billion deficit, a substantial improvement from the $13.9 billion deficit anticipated in May.
Fund managers and economists anticipate that the government's conservative estimate for iron ore, Australia's primary export, at US$60 a tonne by mid-2024, will rapidly transition the budget into a surplus.
ANZ senior economist Adelaide Timbrell commented to The Australian Financial Review, “The longer the iron ore price stays at those high levels, the more likely it is that we see a surplus that’s more than what the government currently expects.” She noted that forecasts often underestimate iron ore and other commodity prices, especially in times like these.
Beijing's boost for the property sector
The rally in iron ore prices to its highest level since June 2022, is partly attributed to Beijing's intensified efforts to revive its property market. China's largest state-owned banks have recently reduced rates for the third time this year, aiming to stimulate economic activity.
Furthermore, Beijing's 1 trillion yuan ($210 billion) plan announced in November to support urban revitalisation has provided a boost to the steel-intensive property sector, plagued by developer defaults.
Rodrigo Catril, National Australia Bank’s senior FX strategist, remarked on the positive reception to China's stimulus, highlighting the beneficial impact of China's demand for commodities on Australia. He anticipates that China's efforts will yield results next year, especially in stabilising the property sector.
Catril forecasts the Australian dollar to exceed US70¢ in the first half of 2024, aligning with the US Federal Reserve's anticipated shift towards interest rate cuts. He also predicts the Reserve Bank of Australia (RBA) will be among the last central banks to switch to an easing cycle due to persistently high inflation.