Chinese credit explosion launches Australian dollar

DXY was weak Friday night. Unusually, so was EUR:

The Australian dollar jumped against the USD but held elsewhere:

CFTC data is still lagging badly but mid-January numbers still had the AUD moderately short at -37k contracts:

Gold jumped:

Oil took off:

Base metals too:

And big miners:

EM stocks were surprisingly subdued:

But junk tracked oil:

Treasuries were sold:

Bunds were bought and the curve is crashing:

Stocks took off again:

US data was weak as industrial production missed:

Industrial production decreased 0.6 percent in January after rising 0.1 percent in December. In January, manufacturing production fell 0.9 percent, primarily as a result of a large drop in motor vehicle assemblies; factory output excluding motor vehicles and parts decreased 0.2 percent. The indexes for mining and utilities moved up 0.1 percent and 0.4 percent, respectively. At 109.4 percent of its 2012 average, total industrial production was 3.8 percent higher in January than it was a year earlier. Capacity utilization for the industrial sector decreased 0.6 percentage point in January to 78.2 percent, a rate that is 1.6 percentage points below its long-run (1972–2018) average.

That explained the weak USD. But EUR was weak too as the ECB buckled:

European banks rallied on Friday after European Central Bank executive board member Benoit Coeure said a new targeted longer-term refinancing operation, or TLTRO was possible, according to reports. “There might be scope for another TLTRO,” Coeure said, according to Reuters. The TLTRO are essentially cheap loans provided by the ECB, that served to temporarily calm the eurozone debt crisis early in 2012. Coeure also characterized the eurozone’s inflation path as shallow, meaning the central bank would have to adapt.

That might normally have held the AUD versus the weaker USD but the clincher was the tearaway Chinese credit data which lifted the battler clear.

Does this break the weak EUR/weak AUD nexus that’s been in sway for the past few months? Perhaps in sentiment terms but not yet fundamental. The Chinese stimulus pulse is neither clearly directed at building nor likely to lift bulk commodities from already nosebleed levels thanks to Vale’s travails.

There is a risk case that a new Chinese credit/building surge could hit a supply constrained bulks market and push iron ore to $120 but it’s not the base outlook yet. Nor would that help the domestic Australian economy or prevent rate cuts given the income only really lifts a few government budgets these days.

So, for now, the outlook for further weakness in the medium term is unchanged for the Australian dollar if on a newly intensified China watching brief.

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