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Australian stocks hit new highs, and the Australian dollar skyrocketed! Will the iron ore heat wave be followed by a plunge?

Recently, a series of skyrocketing prices have swept the financial headlines in the Asia-Pacific region - China's central bank released trillions of liquidity, driving China's stock market to record its biggest weekly gain in more than a decade, and the Shanghai Composite Index finally regained the 3,000-point mark, and even soared to 3,300 points.

Australian stocks hit new highs, and the Australian dollar skyrocketed! Will the iron ore heat wave be followed by a plunge?

Even the long-term lack of good news in the Australian stock market ushered in spring, just this Monday, the Australian stock market hit a record high, taking 8280.70 points.

But how long can this crazy rally, spurred by the central bank's booster, last? What are the specific impacts on Australia's capital markets?

Today, we're focusing on four assets that have been in the spotlight lately – ore prices, mining stocks, the Australian dollar, and bank stocks.

Speaking of Australia, many overseas investors are familiar with another name for Australia – "the country sitting on a minecart".

As one of the world's leading raw material exporters, Australia's reserves and total export value of various mineral resources have been among the top in the world for many years, and if you must find a star product from these ores, then this title is iron ore.

In the past 20 years, Australia has experienced two major cycles of iron ore booms, that is, the "iron ore boom" that is popular in Australia. During this time, iron ore-driven investment and trade as a share of GDP soared from 1% in 2000 to 9% in 2010.

Australian stocks hit new highs, and the Australian dollar skyrocketed! Will the iron ore heat wave be followed by a plunge?

The dividends brought by the ore boom have not only benefited the mining companies, but also driven the entire Australian economy - GDP has almost quadrupled in 10 years to 1.32 trillion Australian dollars.

The real driver of demand for iron ore is the continued investment in the property sector from Australia's largest trading partner, China, which is a key material in the steelmaking process and an essential core of all types of infrastructure.

However, with the economic transformation and changes in the relationship between China and the United States, the glittering iron ore has also begun to fade from the stage in the late 2010s.

Iron ore prices plummeted from $144 per tonne at the beginning of this year to around $90 in early September, an annualized decline of nearly 40%, while Australian-listed mining giants also slumped, with BHP down 39.14%, Rio Tinto down 33.42%, and iron ore giant Fortsk Metals (FMG) down 45.78%......

But just last week, after the People's Bank of China launched a basket of stimulus policies, these sluggish assets suddenly fought back en masse, recording a surge of about 15% in a week, while iron ore prices soared to $113 a tonne (Singapore bulk futures price), up 10% on Monday alone.

Australian stocks hit new highs, and the Australian dollar skyrocketed! Will the iron ore heat wave be followed by a plunge?

Not only that, but the Australian dollar, known as the "commodity currency", is also catching up, with the Australian dollar (AUDUSD) starting to gain momentum from around 0.63 and has now reached below the 0.70 mark.

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Australian stocks hit new highs, and the Australian dollar skyrocketed! Will the iron ore heat wave be followed by a plunge?

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The sharp rise of the Australian dollar is very similar to the magnificent scene during the iron ore boom - taking the Australian dollar against the US dollar (AUDUSD) as an example, between 2001 and 2011, the Australian dollar rose by 126.40%, from 1 Australian dollar can only be exchanged for 0.48 US dollars, to 1 Australian dollar can be exchanged for 1.10 US dollars, a record high in Australia's history.

A careful comparison of iron ore prices and the Australian dollar further confirms a high positive correlation between the prices of the two assets – when the price of iron ore rises, the Australian dollar rises with it, and vice versa.

Australian stocks hit new highs, and the Australian dollar skyrocketed! Will the iron ore heat wave be followed by a plunge?

Obviously, the Australian dollar's wild run is absolutely inseparable from the sharp rise in iron ore prices.

So, will the Australian dollar and iron ore prices continue to rise?

There are many variables that determine the answer to this question, such as ANZ Bank and Macquarie Bank, which recently warned that there is a large downside risk to the sharp rise in asset prices brought about by China's stimulus policy, and behind the surge in iron ore prices, there is also a surge in short-term demand caused by many companies hoarding inventories before the National Day holiday. In the longer term, iron ore prices will return to US$85 per tonne by the end of Q4.

Australian stocks hit new highs, and the Australian dollar skyrocketed! Will the iron ore heat wave be followed by a plunge?

Another significant variable is coming from the United States, as the upcoming United States election in 35 days is likely to be the second key driver of Australian ore demand.

As early as the first half of this year, in the budget announced by the Australian federal government, it repeatedly emphasized a national policy for Australia's future - "Australia Future Made In Australia", and the core of the policy is the second round of ore prosperity built around clean energy, batteries, photovoltaics and other products.

And the protagonist of this new round of ore prosperity is no longer relying on iron ore sold to China, but copper ore sold to United States.

According to the investigation, the mining process of United States copper mines is extremely cumbersome, and the mining companies must go through lengthy legal procedures, coupled with the long preparation period of copper mining itself (it usually takes seven years from the start of ground to the export of copper ore), which also makes Australia, an United States ally, the first choice.

So why is the United States rushing to mine copper?

The answer is simple, in addition to the global transition to new energy, the United States, as the leader of the electric vehicle industry (Tesla), has been driven by China's BYD at the beginning of the year to top the global sales volume. Not only that, Tesla, as an electric vehicle giant with a lack of independent battery production capacity, has always needed to rely on overseas battery supply (Panasonic of Japan, Samsung of Korea, and CATL of China), which makes the United States suffer from the increasingly fierce competition for electric vehicles.

Australian stocks hit new highs, and the Australian dollar skyrocketed! Will the iron ore heat wave be followed by a plunge?

In order to maintain its price advantage in front of consumers, Tesla has been "shortcuting" in many areas, such as insisting on not installing radar and LiDar (both high cost), but has always relied on cameras (low cost) for road surface and obstacle identification, a strategy that has caused Tesla to repeatedly fall into crisis (a large number of accidents).

Therefore, obtaining independent production capacity, especially a stable supply of copper ore, is the top priority of the United States government, and if the Democrats are re-elected, then this US-Australia cooperation may be accelerated (Trump mainly supports traditional energy).

Finally, let's look at the financial sector that has not only outperformed but almost outperformed the broader market this year, especially bank stocks, which account for half of the country.

Prior to the PBOC's stimulus policy, the four major banks all recorded record-breaking double-digit growth, with the leading stocks Commonwealth Bank (CBA) and Westpac Bank (WBC) being the most impressive performers this year.

Australian stocks hit new highs, and the Australian dollar skyrocketed! Will the iron ore heat wave be followed by a plunge?

However, the central bank's stimulus policy interrupted the surge in bank stocks, leading to a massive outflow of speculative funds into mining stocks (the aforementioned mining stocks rally), which also led to much speculation in the financial media: Is the bull market in bank stocks over?

The answer to this question really lies in two points – interest rates and yields.

After the Fed cut interest rates, Australian inflation also fell back to around the RBA's target range (2.7%), which paved the way for the RBA to cut interest rates in the fourth quarter.

Although the low interest rate environment after the interest rate cut will have a negative impact on the bank's net interest margin (NIC) and revenue, it significantly reduces the risk of bad debts continuing to increase in the high interest rate environment, which is conducive to maintaining the bank's fundamentals.

Secondly, there is the stable yield of the Bank of Australia, which is created through a stable dividend payout, which will become more attractive when the yield of other fixed income assets (the yield of fixed deposits, treasury bonds, etc. follows the central bank's interest rate) falls.

Therefore, there is still room for the financial sector to rise steadily. The Australian stock market may continue to be driven by the momentum brought by the financial and raw materials sectors and continue to explore the upside.

Is a new era of growth for Australia here?