Australia Focus : Of China Bondage

The biggest loser in the developed world after New Zealand, even the EUR cannot match the AUD’s losses for the week, and it closed at 0.7912 against the USD for the first time since 2009.

WCRS

It is less to do with the BoJ or the ECB or the SNB but rather growing speculation that the RBA will be cutting interest rates as early as next month on their 3 Feb meeting (1130 am SG time), after the Bank of Canada’s surprise rate cut this week. http://www.bloomberg.com/news/2015-01-22/aussie-below-80-cents-as-canada-europe-feed-rba-rate-cut-bets.html

At 2.5% carry a day against the zero/negative interest rates that the other majors present, I say the rate cut better happen soon.

The other aggravating factor would be the slowest growth in China for the last 24 years which President Xi has hailed as the “new normal”.

Commodity prices continue to plunge which is the other big drag with Goldman now joining others in cutting the outlook on iron ore and all types of coal. http://www.bloomberg.com/news/2015-01-23/goldman-joins-banks-cutting-iron-ore-outlook-on-global-surplus.html

commodity weekly

Yet we note that China’s shipment of iron ore from Australia increased 32% in 2014 and may sustain into this year as the less competitive and higher cost producers in China and Asia are forced to shut.

And finally, the hot housing market is finally cooling with clampdowns on lending and crackdowns on illegal foreign buyers to come.

Australia is caught between a rock and a  hard place – a relatively small economy and population that depends on foreign capital, purchases and investments to grow. She is in bondage with the rest of the world, particularly China where she is most reliant on for buying the stuff she digs out of her grounds.

A rate cut is now simply inevitable to stay afloat. http://www.bloombergview.com/articles/2015-01-23/australia-must-rescue-its-economy-from-risks-of-china-slowdown

As of 20 Jan, the net shorts are not at a record yet which is understandable for currencies trading at extremes – who would dare to short the AUD when it is at a 5 year low ?

The Citi Pain Index is at an 18 month low, a negative number which suggests that market will be buying AUD on any surprise uptick.

AUD UPDATE

We note that Australian interest rates are trading at historic lows in every tenor and their yield curve has inverted but still giving one of the highest yields in the developed world.

aud iyc

The AUDSGD has fallen to 1.0641, down almost 9% from September 2014.  With GDP growth at 2.7% yoy for Australia (as of Sep 14) and Singapore at 1.5% yoy, I would still be looking to buy AUDSGD which is at a 5 year low after the RBA cut. Target level 1.0450.

Leaving with the indicative bond prices.

aud bonds