International Focus : Australia and China

It is difficult to write anything sensible these days with market views in turmoil, economic numbers pretty much meaningless and the fate of the world hanging on expectations of stimulus out of the ECB and PBOC.


The Australian dollar has decoupled from its commodity roots, sticking to its new global carry champion status amongst the developed countries, strengthening against almost every DM currency except for Canada and Korea.

Iron ore prices have sunk to a 5 year low amidst a Chinese slowdown.

iron ore prices

The market expectation is for a AUD dollar respite against the USD when the Fed starts hiking coupled with the slowdown in Chinese commodity demand and expectation of RBA on standstill into the next 12 months.

I have my own longer term views on the matter especially when AUD is still the best horse in the stable amongst DM currencies for carry trades.

That we will have QE from the ECB next week (4 Sep) is a foregone conclusion. Whether the market is over prepared for it is another. Nevertheless the result would still be stimulatory that will be a boon for the AUD dollar and her bonds.

That the RBA will be lame next week (2 Sep) is largely anticipated. There is little reason for any sudden policy actions. Short of an announcement of perhaps new policy tools or currency intervention which is unorthodox, we can only expect nothing.

Thus there is all likelihood that EURAUD will break under 1.40 (target 1.3880)  in the days ahead and the yield curve will continue down the path of least resistance downwards.

EURAUDEURAUD 7 year daily chart.

With AUD government bonds still seeing great demand in the latest auction of 2018 papers that saw 5 times over subscription (vs last week’s 7 times for the 2017 bond), it is no wonder that yields are still in plunge mode, dropping 0.06 to 0.19% on the week as new issues priced continue on a healthy trend.

Goldman raised 750 mio of 7 year papers at 4.7%, along with Bank of America in the 6 years at 4.25%and New South Wales giving a good 4% for 12 years.

And despite the downgrade of Western Australia by Moody’s to Aa1 (from AAA), bonds like Perth Airport 5.5% 03/2021 continued to make new highs trading up to 105.835 since its issue in March at 98.873. The Western Australian treasury bond 3.7% 10/2018 held steady on the week at 3.08%.

I have my reservations on the markets’ over pre-emption of the central banks’ policy actions and announcements next week. And we have a bunch of anti government rallies this weekend down under.

Yet we have to be circumspect in the larger scheme of things – that opportunities (carry trades) are meant to be exploited and it ain’t over till the fat lady sings.

2014 AUD Bond Prices
aud bonds


China has more than their fair share of investor protests with real estate investors demanding restitution and the protests involved in failing high yield trust products.

Expectations are running high for more stimulus from the government. Just in today, we have Ningbo City scrapping home purchase limits.

Everyone wants a piece of China and Chinese aid, from 90 year old Mugabe to Sri Lanka to Africa. Not to mention the $518 million poured into the China ETF in August, the most since 2012, that is hoping to profit from an economic stimulus of sorts.

While markets are talking about the Alibaba roadshow on 8 Sep, the CNH bond market is taking a breather.

Bad news out of Shui On, with their earnings dropping 48% giving markets a small scare (and supposedly causing a HSI dip in the final hour of trading on Wed) and Country Garden’s 15 for 1 rights issue at a 31% discounted price which bodes well for their bonds.

Nothing big happened in the way of spreads even with a new incident of China Rongsheng (1101 HK and CHIRON bond ticker) overdue on 43 million in loans after late payments last month.

It does look like markets are trading into the future and past the current setbacks despite the media’s preoccupation on China woes.

My personal view is that it is impossible to analyse the situation when information and data is suspect. Thus the only path available is the path of faith in the Chinese government that they will ensure order and honour the payments of their subjects like they have done so far.

And again, in the larger scheme of things – that is an opportunity to be exploited.

CNH Bonds Listed in SGX and HK