Australian dollar sags as China swoon spreads

DXY was firm overnight. EUR was stable and CNY strong:

The Australian dollar was weak against DMs:

And EMs:

Presumably after yesterday’s NAB survey shocker. Gold was strong as we move into another Fed meet:

Oil too:

Base metals are still spoiling the party:

Big miners are OK. Aussie bulkers flew:

EM stocks are still threatening breakout:

Junk eased:

Treasuries were bought:

The bund curve flattened:

While stocks were mixed:

US data was OK with house prices slowing to 5.2% but still decent:

US consumer confidence took a hit from the shut down:

But that ought to pass quickly as government reopens and tax returns rain down.

I am still not especially concerned by the US. The shutdown will punt some first quarter activity forward so by mid-year it should still look decent as it heads into the fiscal cliff that will drag it down in H2. Even that still looks manageable on the domestic demand front.

The worry for the global economy remains external demand, specifically the China/Europe nexus, via FTAlphaville:

In our solar system, eight planets (sorry Pluto) revolve around the sun. As Stephen Jen and Joana Freire of Eurizon SLJ Asset Management see it, the US economy once served as that sun. The rest of the world, he says, were planets “revolving around, and being influenced by, the gravitational pull of the US economy.”

Now, a new sun has emerged. For Jen and Freire, “China has become not only big enough, but also the links of its economic ecosystem powerful enough” to pull on other “planets.”

…Using a series of network theory algorithms, Jen and Freire found that China’s influence on the world is now as sizable as the combined influence of the US and EU. The shift occured following the financial crisis in 2008, which saw the US’s impact on average global GDP shrink from just over 40 per cent between 1989-98 to half that between 2009-18:

What is more, the $9tn expansion of China’s GDP in dollar terms over the last decade outstripped that of the US and EU, which grew $7tn and $2tn respectively over the same period.

There’s bound to be some convergence as China’s economy continues to contract. And based on the most recent reading of industrial profits, China’s outlook is pretty dire. While profits officially fell another 1.9 per cent year-over-year in December, Freya Beamish at Pantheon Economics reckons that if other, more illustrative data is considered, the situation looks to be much worse (Authorities make certain adjustments, which Beamish says skew official results):

Fortunately for chief executives stateside, Europe bears much of the brunt for whatever originates in China. As Jen and Freire find, the region’s exposure is far greater than that of the US or the rest of the world:

Just as Draghi believes China can rescue the EU economically, so too can it drag the region down with it.

Which is why I see both China and Europe having to ease more aggressively than the US ahead which is CNY, EUR and AUD bearish.


    • Quality of those bridges and apartments makes things even worse.
      hence why I argued they are better off to direct all stimulus to renewables, education, tourism and modernising old steel mills and other manufacturing plants in order to drive better productivity, reduce pollution, develop new skills etc..
      If the aim is to just keep people employed in order to avoid riots then start cleaning old polluted mining and industrial areas, employ another 2 million food/health inspectors in order to eliminate food poisoning which in return will build consumer confidence in the domestic produce.
      I think situation is so bad there that even compensating people that bought crappy apartments and then start demolishing and recycle all that material in order to build proper quality apartments (implement better processes to monitor quality) and sell them again will be more productive than building more of the same shite.

      So many ways to make that stimulus more effective.

  1. It seems to be stuck between .70-.72 . With all the news coming out etc…. I still cant believe it sitting at this level.

  2. Let us see how firm DXY is tonight.
    The Fed is becoming more dovish by the day.
    A change in policy is coming.
    QT will end this year, and rates cuts will be the next step.
    Those shorting the AUD must be pretty confident that the Chinese economy will really tank this year.
    Investors buying gold and bonds are betting on a weakening USD/weakening economy.
    Let us hope they are correct.

    • USD weakness is predicated on what is happening within the DXY basket; specifically the EUR. It’s all relative, and relatively speaking, the EU is already flirting with recession.

      There is a global slowdown, and it is not the US that’s leading the way down, it’s China and Europe. Nevermind the unfolding Australia bust and it’s impact upon the AUD. The macro may change, but it hasn’t changed yet.

      • Brenton, Europe might be leading but the US will follow.
        There are signs of deterioration in the US economy-autos, housing etc.
        The yield curve is flattening.
        There are signs.

  3. Story of my life.. I sold and gold goes to the moon. Still have some shares in WGX which will triple if I sell.

    • Nikola, gold will move big tonight. Let us see what Powell says.
      You could jump back on if you think Powell is becoming move dovish.
      It all depends on your judgement.