Jane Foley, Research Analyst at Rabobank, suggests that the AUD is the best performing G10 currency on a 1 day view lifted by the better performance of the iron ore price which gained more than 7% over the course of last week. Key Quotes “To some extent the outlook for the price of iron ore has been impacted by that in the oil market where there is a clear disagreement about whether the price is in the process of bottoming or whether there is yet further to fall. CFTC data last week show the highest level of open interest since the tracking of this data series started in 2006. Softer demand for oil in China is suggestive of weak levels of activity in the production sector and this is a negative factor for the outlook for steel and iron ore. For some time overcapacity of infra-structure in China’s productive and housing sectors has boded poorly for the outlook for steel and iron ore. News that the EC is set to impose provisional duties later this month of up to 16% on Chinese steel exports following its investigation into dumping is another factor that should weigh on the outlook for iron ore. Although there are some temporary supply factor supporting the iron ore price including news that shipments from a key Brazilian port have been halted due to environmental concerns and a cyclone last month interrupting shipments from Port Hedland, overall we find it difficult to muster up a great deal of enthusiasm regarding the outlook for iron ore prices this year. We see scope for only a modest recovery in the oil price later this year and we retain a very cautious outlook for iron ore. Consequently we do not expect a lot of respite for the value of AUD/USD from this front. Having blown out in Q2 2015, Australian current account narrowed in Q3 last year from AUD20.5 bln to AUD18.1 bln. The better news stemmed from a better performance of resource exports in the quarter. The risk, however, is that this will not sustain. The Bloomberg consensus suggests that Australia’s current account deficit probably reached -4.3% of GDP last year and that it will be 4.0% y/y in 2016. Some forecasters, however, are suggesting a widening in the current account deficit to -6.0% of GDP this year. At the end of March 2015, Australia’s net foreign debt stood at AUD955 bln or 59.5% of GDP, a record high. By the September quarter this had risen to AUD993.8 bln. In view of our concerns about growth in China and the negative implications for Australia’s trade balance, we see a clear risk of further downside pressure on AUD/USD. We retain a 12 mth forecast of 0.64.” For more information, read our latest forex news.