Overview: Fortescue Metals Group and the AUD/USD parity

Fortescue Metals Group: The stock market is recently coming to a small plunge, which I understand to be fairly normal after September’s short rally. One stock that I found to be performing well at this point in time is the Fortescue Metals Group (FMG @ ASX). They had a remarkable growth in the last 2 years since their first deal to start exporting iron to our neighbours in China.

The shipments of iron to Asia are forecasted to be growing at a fast pace in the next decades, as the demand for primary materials by the economic giant -China- increases significantly. The technology boom and the massive production capacity of China explains the demand.

Fortescue Metals Group is the operator of a mine in Cloud Break and also have interests in Christmas Creek, Mount Nicholas, Tongolo and Solomon. Considering the growth potential and solid management of the company, the price of the stock is relatively cheap.

Technically, the stock is strong. Today they reported a dip of 9% on the iron shipments for the September contracts, however the investors still seeking to buy the stock, which closed up 1.27% (being almost 5% up at some point at today’s trade).

We have seen the stock rallying for the last 2 weeks hitting a 52 week-high. This has also a correlation with an optimistic sentiment from the Aussie dollar appreciation.

In 2008 FMG reached $12.13/share (5-year chart):

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The AUD/USD parity: Today the market closed with the pair trading at 0.9969. I wrote about the possibility of this parity to be happening in stages on the 19 of March 2010 post. I still expect a bullish season until the end of the year’s data release but the price correction will be sharp.

So what is going to happen if the Aussie does hits the USD$1,00 mark?  Well, fundamentally it is a very complex scenario with ‘pros and cons’.

With a strong Aussie dollar, the Australian exporters will suffer and the government will not be happy about the Trade Balance (hence the interest rates rise to come). It is an enigma but technically I presume that the market is ‘testing’ that mark.

Once the cross is made, trading desks and hedge fund managers will start pulling triggers. So you can expect a ‘choppy’ game featuring around that line. We all know that the Aussie is overpriced, overbought and the US is walking (or limping) slowly out of a recession. It is odd and perhaps the plausibleness of such prices to remain at this level is a strong opponent to the current situation.

Simplistically, if we trace a line on the USD$1,00 mark and analyse all facts that influence the forementioned pair (governments and their fiscal policies, central banks and their monetary policies, history facts, risks likelihood, etc), what are the chances of the Aussie to remain with a reasonable sustainability above this line?

I would be far more confident in a $0.96 mark in the short term, and $0.78 to $0.92 range for the Aussie for the longer timeframe.

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