International Focus : Australia and China


Wrong footed Australia would have to wait for another day for the AUD dollar to show any sign of weakening.

Longs are building in the AUD position and the last time the market was this long, AUDUSD was above 1.00.

audusd 5 yearCHART : CFTC AUD positions vs AUDUSD 5 year

A record high in the ASX on 4 Sep.

Propertyguru gets ready for an Oz ipo.

Great GDP number (+0.5% QoQ vs exp +0.4%) and a better deficit (A$1.36 bio vs exp $1.75 bio) but  it doesn’t help that iron ores prices have dropped below $85 (note that UBS expects prices to rebound to 100 sometime this quarter) for the first time since 2009.

Even if China is eating more beef and is expected to eat 70% more beef by 2030 and Australia has dreams of becoming the food bowl of Asia, the optimism in the AUD is just fluff at the moment and a hot money play like we pointed out last week, that the carry arbitrage is too lucrative to ignore.

RBA Stevens dug his own grave by declaring no more rate cuts just 2 days before ECB announced intentions of a 1 trillion USD bond buying program. And they can talk until the cows come home but the AUD will not weaken just because they say it is overvalued.

“Sept. 2 (Bloomberg) — The Reserve Bank of Australia said an overvalued currency is hampering the economy’s transition to domestic growth drivers from mining investment as it extended the longest pause in interest-rate adjustments since 2006.
Australia’s expansion will be “a little below trend” in the year ahead, Governor Glenn Stevens said today in a statement announcing the overnight cash rate target would be held at a record low 2.5 percent for a 13th month. The decision was predicted by all 31 economists surveyed by Bloomberg and markets had seen no chance of a move.”

Yet Australia will continue to be the darling of investors as Melbourne decides to go on a building spree with another 2,800 apartments that will create 6,000 jobs to build and Partners Group looking for infrastructure investments onshore etc.

Foreign investors are getting a bit jaded on AUD bonds, buying the least amount of AUD debt in a year.

“By Masaki Kondo
Sept. 2 (Bloomberg) — Foreign investors bought A$10b ($9.32b) of Australia’s debt securities in 2Q, lowest amount since 2Q 2013, and less than A$10.7b in 1Q, according to balance-of-payments data from statistics bureau.
• Non-residents’ holdings of nation’s debt securities climbed to A$239.94b in 2Q, most on record, from A$227.1b in 1Q

Yields rose on the week as the prospect of rate cuts diminished. Not to worry really, because the prospect of a hike in the next 12 months is still pretty LOW.

CS - RBA Chance of Rate Moves in 12 monthsChart : Credit Suisse RBA Chance of Rate Move in 12 months.

My EURAUD trade suggested last week came to a nice ending, beating my 1.3880 expectations.

I notice the AUDCAD holding nicely under its 2014 resistance even after the Bank of Canada’s meeting concluded that they had a neutral outlook on the next move which I interpret to be more optimistic than the the RBA given that Canada will be first to enjoy the US recovery.

My medium term expectation is for a a lower AUDCAD at 1.00 which also means I would also expect AUDUSD to correct in the near term (target 0.9230).


As for bonds, the sell off was expected and rates are still lower on the month even with this 0.08- 0.19% correction.

They are still the best ones to be holding going ahead but for the corrections that will occur as a consequence of a AUDUSD correction and the end of the taper.

aud bonds


CNH UPDATE5 year high for the HSI and 1 year high for the Shanghai Composite.

Bad news and good news and nobody cares if China broke its promise on the democracy issue and that UK has been warned not to pursue (or face dire consequences).

China’s consolation is that IT IS ALWAYS RIGHT and we will be alright if we just follow their lead.

Good news for the Chinese companies and provinces as they are allowed to issue more bonds to spread the risk out to the larger market community.

1.  China to Allow A- share listed Property Developers to Tap Interbank Bond Market –

2.  China’s parliament, National People’s Congress, formally approved the amendment of the budget law, allowing local governments at provincial level to issue municipal bonds directly (effective from January 2015).

Sept. 5 (Bloomberg) — Form of China’s local government debt will gradually shift to bonds from financing vehicle borrowings under new budget law, Ma Jun, chief economist with the Research Bureau of People’s Bank of China, wrote in an emailed research note today.
• Transparency of local government budget will greatly improve: Ma wrote
• Government officials incurring significant debt risks can be made accountable, forcing them to behave within budget constraints, Ma wrote
• Local governments are expected to become more sensitive to interest rates, helping with PBOC’s efforts in developing a price-based monetary policy mechanism

3. Shanghai FTZ May Allow Panda Bond Issues in China, Official Say

”    Sept. 3 (Bloomberg) — Overseas parent companies of units registered in Shanghai’s free trade zone may be allowed to issue Panda bonds in China, Li Jun, deputy secretary general of the zone administration, said today at a forum in the city.”

These developments are timely especially when we have about $3.5 bio in offshore debt of mostly Chinese real estate companies due in the next 6 months, according to Deutsche.

The bond market remains pretty tight with supply aplenty as we brace for the gush of offshore capital raising by Chinese banks as Bank of China hires 9 banks to prepare for its AT1 issue and another 4 for its Tier 2 issue.

We can expect PBOC to remain on close guard and maintain liquidity in the system to support market development even as news emerge that more clean energy companies are facing distress.

My USDCNH view remains intact for 6.12 in the near term as mentioned last month.

There is just so much going on for China that we can safely ignore all the minuses as the world remains gripped in the death throes of the ECB’s policy suicide. And we have the FOMC just around the corner which does not affect China (they will not dare) which makes CNY the safer bet.

USDCNYChart : USDCNY 2 year daily

I am neutral to slight bullish on CNH bonds, better if they are CNY actually so you may want to consider the funds that have onshore presence. The stocks I am not so sure. With Alibaba coming, China centric portfolios may have to make room for the new benchmark perhaps after the Chinese holiday on Monday.

Happy Mid Autumn’s.


Part 2