Steel prices key for AUD in Q4

As the dust settles from the Fed's "dovish hold", attention turns back to China, especially in the context of its influence on the AUD. It is often argued that steel prices provide the best metric of China's underlying demand for Australia's key exports of iron ore and coal, both inputs for steel production. Indeed, steel prices tend to be far more stable and less influenced by inventory swings compared to iron ore. Steel prices have fallen by 4.3% since China's fixing reform on August 11, consistent with the decline in AUD that is expected following the RMB depreciation.

However, the outlook for steel prices from here has become clouded by the various easing measures announced by China- while these have seemingly not helped overall growth, there is evidence of stabilization in property and infrastructure sectors that are the predominant users of steel.

"Our assessment of steel price dynamics in this note suggests it is likely to stabilize if not rise heading into year-end, and is a key reason we are comfortable with projecting only a small further decline in AUD/USD(to 0.69) by December. We continue to expect it to reach 0.65 in 2016 as capital inflows into Australia's resource sector decline. Over the coming months, this would present an opportunity for AUD to outperform against some crosses, most notably the EUR, in our view", says Bank of America.