Australia Focus : Chinese Kangaroo Stew

Back when I was in Perth, a friend from China told me that his uncle liked to stop by dead kangaroos on the road to pick a nice juicy tail for stew and there were plenty of them those days before all those condos started popping up all over the place, each costing more than what my best friend there paid for her entire portfolio of 6 properties bought in the 90’s.

 

Well, Australia has been a bad boy in recent months, choosing to name Japan as their “closest friend” (which is partially true ‘cos Japanese have been steady investors since the 80’s and donated much of their losses to the Australian people during the subsequent crash) and then choosing to side Obama against Russia by threatening to ban Putin and now, fighting in the Middle East alongside with America.

This is not to mention the “mongrel” comment one of the richest billionaires leveled at the Chinese which was followed by apologies from all levels of the government.

China has taken everything in stride, a la Confucius style, and now, its payback time.

“The crucial final stages of free trade talks between Canberra and Beijing have been thrown into turmoil following China’s shock decision to impose harsh new tariffs on Australian coal supplies, reports the Australian daily The Sydney Morning Herald. The sudden reversion to is designed to save the local coal industry and will see all coking coal imports hit with a 3% price hike and double that applied to the lower grade thermal coal attracting an import tariff of 6%. It comes after the China National Coal Association, had urged Beijing to act swiftly to support the besieged sector, where 70% of the miners were making losses and more than half owed wages.

The news brought an angry reaction from the federal opposition and the Australian mining sector. The Minerals Council of Australia has urged the Australian government to initiate urgent discussions with Chinese counterparts to seek the reversal of the decision.”
Read more here: http://www.smh.com.au/business/china/shock-china-coal-tariff-decision-throws-australian-free-trade-talks-into-turmoil-20141009-113vul.html#ixzz3Fh7mzdSh

Not to worry, it is just coal. Iron Ore is unaffected yet.

But it wasn’t enough to stop the slide of the ASX suffered its biggest 1 day loss in a year which is not a surprise given the heavy weights of oil and mining on their index.

ASX INDEX

It is not the biggest loser in Asia amongst all the double digit gains, year to date, for most of the Asian exchanges (India +24%, Indonesia +16%, Thailand +19.5%, New Zealand +10.3%, Shanghai +12%, Philippines +21.6%, Vietnam +22.4%, Pakistan +19%, Sri Lanka +23.8%, Laos +12.9% !!)

Japan and Korea have it worse.

One interesting correlation I discovered that is AUD has displayed a 0.95 correlation (1 being the highest), with the MSCI EM FX index. It stands out because the general perception has always been that AUD would be more correlated to Iron Ore, their biggest export, or to China, their biggest export market or even, the FTSE Mining Index which was favoured at some point.

Yet, the correlations which I ran for the year of 2014 to date show that the AUD dollar has become highly correlated in the past months to the EM FX index that implies that the AUD dollar could have become a proxy hedge for the more illiquid EM currencies.

This is followed closely by the EUR with Iron Ore prices fading in influence even though Iron Ore used to be the dominant factor in the past years.

aud mxef index corr

The evidence can be found in the CFTC reports that asset managers are holding record shorts for the AUD while hedge funds and banks are long.

The EM angle does complicate things a little and it does not help that economic data has disappointed this week with last month’s record breaking 121,000 jobs created, revised down to just 32.1 thousand which is still a good number but almost entirely negated by the 29.7k jobs lost this month.

And that the RBA, for all their months of yapping at the AUD strength, made a BIZARRE comment this time round that AUD OFFERS LESS ASSISTANCE THAN NORMAL IN ACHIEVING GROWTH (???? !!!! but in July, they said otherwise…) even as they note that EXCHANGE RATE REMAINS HIGH BY HISTORICAL STANDARDS (5 year average is 0.9746, 10 year average is 0.8840 and we are at 0.8686 at the moment).

Meanwhile, Prime Minister Abbott’s popularity is boosted by his war efforts and keeping the citizens safe amidst new criticism of his Budget that appears to penalise the poor. http://www.smh.com.au/federal-politics/political-opinion/analysis-finds-it-is-no-accident-that-federal-budget-makes-the-poor-pay-the-most-20141010-114cyt.html

My AUDUSD did not quite reach the 0.89 as I had expected, hitting a high of 0.8899 (arrrggghhh) on 9 Oct. Note that this is after it manage its 4 year low of 0.8643 last Friday, 3 Oct.

The EURAUD did not even break 1.43 and we are seeing a consolidation pattern here.

The good news for the AUDUSD is that we closed the week up (not too difficult) and we can possibly see a small leg up next week after people have had time to rest this weekend, panic a day or two come Monday after US equity markets closed that their lows as Fed’s Plosser says that the public has come to expect too much from them.

audusd weekly

The bad news is that AUD will not be flying anywhere soon until China says so or they find a replacement for China which is impossible if you look at this table of total annual trade for 2013.

AUD ANNUAL TRADE

91.55 Bio of exports to vs 50 Bio of imports from China.

Let’s see how the prodigal son mends the relationship.

Still good news for bonds as issuance dwindles and demand for the currency falls. Clipping coupons is the way to go.

aud-update

Leaving you with the indicative prices.

aud bonds