Australia | The terms of trade are booming, but this time it’s different
Export prices have surged over the past 9 months, driven by record high iron ore prices. This has driven the terms of trade to its highest level since 2011– the height of the mining investment boom. But this terms of trade episode will be very different, and it will not have far-reaching consequences for the structure of the economy as the last boom did.
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- The current iron ore price cycle is expected to be transitory, and it will not trigger a large investment response. Indeed, the terms of trade are expected to fall back over the second half of this year.
- The investment response will be more modest than the last terms of trade boom.
- We expect the AUD will depreciate to $US0.75 by the end of 2021, and trade around that level for 18 months before appreciating alongside monetary tightening in Australia.
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