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Is relief around the corner for BHP and Rio?

A ‘dovish’ speech by Reserve Bank governor Glenn Stevens has given reason to believe that the nation’s official cash rate could be dropped. Stevens cited subdued inflation data, weaker than expected building approvals and a declining mining sector.

According to the Sydney Morning Herald, financial markets are suggesting that there is a 90% chance the rate will be dropped when the board meets next Tuesday, which caused the dollar to drop as low as US90.08c on Wednesday.

Regarding the inflation levels, Stevens stated that “we have been saying recently that the inflation outlook may afford some scope to ease policy further if needed to support demand… The recent inflation data do not appear to have shifted that assessment.”

One of the highlights of Stevens’ speech was his references to the diminishing strength of the mining sector – a factor Paul Bloxham, HSBC’s chief economist for Australia, pointed out was “the first occasion when the RBA seems to have declared that mining investment is now past its peak.” Stevens acknowledged the fact that growth in non-mining sectors was not currently sufficient enough to offset the fall in mining investment.

Many of Australia’s largest miners have indicated their concerns regarding the sustainability of future operations – particularly due to falling commodity values amid diminishing global demand. BHP Billiton (ASX: BHP) and Rio Tinto (ASX: RIO), for instance, have both formed a heavy focus on cost cutting and shareholder returns to ensure a bright future.

Foolish takeaway

It is quite possible that we will see the dollar fall further than its current level should the RBA decide to cut the cash rate, which would provide miners with a sigh of relief. If the dollar drops, global customers would be more attracted to purchase our resources which would increase the profitability of our miners substantially. In fact, BHP believes that for each cent the dollar drops compared to the US currency, their revenue could increase by $100 million.

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Motley Fool contributor Ryan Newman does not own shares in any of the companies mentioned in this article.

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