The Australian dollar took a beating in Asian session trade today after the miner BHP Billiton reported a -35% drop in earnings and stated that there would be no major new projects initiated in 2013 due to commodity market volatility. BHP’s group profit fell to $US17.11bn from the record $US21.7bn posted in 2011. Profits are likely to decline further due to the sharp fall in iron ore and coal prices since the end of the group’s financial year.

The minerals business which a critical growth sector for the Australian economy is being affected not only by the falloff in demand from China, but also by sluggish growth in US and recessionary pressures in Europe. Some analysts believe that Australian terms of trade could decline as much -15% next year as spot metal prices continue to decline. Such a scenario would very likely trigger a recession in the broader Australian economy – something that the market at this point does not expect at all.

Indeed, today’s BHP Billiton results stand in sharp contrast to the relatively sanguine tone of the RBA minutes issued yesterday, and suggests that Australian monetary officials may have to adjust their policy if demand deteriorates further. The Aussie dropped through the 1.0450 level in the news as its hold on the 1.0500 figure proved elusive. However perhaps more interestingly EUR/AUD has climbed to a new 20 day high of 1.1925 as the re-balancing in the pair continues to take place. The cross has been in a massive downtrend this year as the Australian dollar attracted capital both as a risk currency and as a safe haven trade. However, if the bears are correct and recession risk is much greater than the current consensus view then the short covering in the cross will continue with the key 1.2000 level coming into view over the next few days.