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How depreciating local currencies are helping iron ore miners

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Weakness in domestic currency

Most of the revenues for resource exporters are in US dollars, while costs are in domestic currencies. Any weakness in domestic currency offers a cushion to companies in terms of cost benefits. Let’s take a look at how depreciating local currencies are helping iron ore miners.

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Australian dollar depreciation

Recently, the Australian dollar (or AUD) touched a four-year low against the US dollar (or USD) due to poor economic data. Data for the US has been comparatively stronger. The AUD was down 13.5% in February in comparison to the 2014 average. The Reserve Bank of Australia (or RBA) still thinks the AUD is overvalued. The bank expects further depreciation in local currency, particularly given the continuing declines in key commodities.

The RBA believes the exchange rate is offering less assistance than normally expected in achieving balanced growth in the economy. All other things being equal, a further depreciation of the AUD would tend to support demand for Australian producers such as BHP Billiton (BHP), Rio Tinto (RIO), and Fortescue Metals Group (FSUGY).

Brazilian real depreciation

The same logic applies to Brazil, so Vale SA (VALE) should benefit from the depreciation of the Brazilian real (or BRL) compared to the USD. In a recent presentation, Vale showed how the revision of the USD to BRL exchange rate from 2.00 to 2.60 will help the company to achieve cost and capital expenditure reduction. The BRL was down 19.3% in February in comparison to the 2014 average.

The iShares MSCI Global Metals & Mining Producers ETF (PICK) is a good way to get exposure to this sector without choosing individual companies. The abovementioned companies form about 34% of PICK’s holdings. The SPDR S&P Metals & Mining ETF (XME) also invests in metals and mining stocks.

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