Australian dollar smashed again as Chinese credit chokes

DXY was down last night, EUR up and CNY down:

The Australian dollar was smashed against DMs:

Mixed against EMs:

Gold raced to new highs:

Oil held on:

Metals were mixed:

Miners fell:

EM stocks too:

EM junk was smashed, a warning to all markets:

Treasuries boomed:

And bunds:

And Aussie bonds:

Stocks were hit:

Westpac has the wrap:

Event Wrap

Italy is stepping closer to a vote of confidence in Conte as PM that may see the end of the current fragile 5 Star/League coalition. This may result in another coalition being formed, a caretaker technocrat government being appointed or flash elections. The last option is what Salvini wants, but he may be thwarted given the need for a budget to be passed in September.

Event Outlook

NZ: REINZ housing data for July will be watched for any impact on sales from the continuing decline in mortgage rates. Food prices for July will impact Q3 inflation forecasts.

AustraliaRBA Assistant Governor (Financial Markets) Kent speaks at the Finance & Treasury Association Breakfast, Sydney 8:00 am. Jul NAB business survey last showed conditions at +3, a below average read.

Euro Area: Aug ZEW survey of expectations were last at -20.3, having taken another leg lower in recent months.

UK: Jun unemployment rate is anticipated to remain at 3.8%.

US: Jul CPI is expected to rise 0.3% seeing annual inflation edge up to 1.7%yr from 1.6%yr. Core is seen to increase 0.2% with the annual pace holding at 2.1%. Jul NFIB small business optimism and the Q2 NY Fed household credit report are released.

There wasn’t much data but all of the damage was done early to the Australian dollar with the release of weak Chinese credit data, via Reuters:

China’s banks extended surprisingly fewer new yuan loans in July, while growth of money supply and total social financing also slowed, raising pressure on the central bank to ease policy further to support the slowing economy.

Chinese regulators have been trying to boost bank lending and lower financing costs for over a year, especially for smaller and private companies which generate a sizeable share of the country’s economic growth and jobs.

Chinese banks extended 1.06 trillion yuan ($150.06 billion) in new yuan loans in July, down from June and falling short of analysts’ expectations, according to data released by the People’s Bank of China on Monday.

Analysts polled by Reuters had predicted new yuan loans would fall to 1.25 trillion yuan in July, from 1.66 trillion yuan in the previous month.

Chinese broad credit growth fell to 11.1% and the reflation is in trouble:

The only question is is it deliberate or out of control? As we know, China has been forced to bail out three regional banks in recent weeks and with no end in sight this is obviously going to weigh on credit issuance and growth at the margin, if via no other channel of contagion than confidence.  To wit, China economist Wei Yao at Society General:

It would not be an overstatement to say that Baoshang’s fallout is a milestone in China’s deleveraging reform and financial liberalisation. The deleveraging process is bound to expose weak institutions along the way, and it is only a matter of time before counter-party risk reaches the interbank market. …When the deleveraging process enters the very core of the financial system, the risk of things going terribly wrong rises. We still think China has a chance to pull through without a financial crisis, given the Chinese government’s control over many things…but we will be keeping a close eye on interbank developments, as this may be the source of under-appreciated risk for the global economy. We are not yet convinced of a clear recovery trend. Against a backdrop of continued trade uncertainties and deterioration in the liquidity conditions of small financial institutions after the PBoC’s takeover of Baoshang Bank, the economy remains on shaky ground.

Interbank spreads have blown out, via Goldman:

…the sustained spikes in intraday repo rates suggest that some banks are still under pressure and are having to pay higher costs to obtain funding in the interbank market. A number of action has been taken to ease concerns regarding credit risk at smaller banks, including the recent equity injection into Bank of Jinzhou by ICBC Financial Asset Investment Company and China Cinda Asset Management

That said, the PBOC could be doing more with liquidity if it wanted. But not without trashing CNY.

As the trade war intensifies, the impossible trinity – controlling interest rates, capital flows and currency all at once – is tightening its noose around China. The biggest victim so far, and ahead, is the Australian dollar.

Houses and Holes

David Llewellyn-Smith is Chief Strategist at the MB Fund and MB Super. David is the founding publisher and editor of MacroBusiness and was the founding publisher and global economy editor of The Diplomat, the Asia Pacific’s leading geo-politics and economics portal.

He is also a former gold trader and economic commentator at The Sydney Morning Herald, The Age, the ABC and Business Spectator. He is the co-author of The Great Crash of 2008 with Ross Garnaut and was the editor of the second Garnaut Climate Change Review.

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    • St JacquesMEMBER

      Ambrose is pretty spot on but the EU cannot afford to give the UK the priveleges of membership without its obligations. This is not going to end happily.

  1. When will people realise that there is a natural limit to the number of times you can stimulate without mortally endangering your currency, notwithstanding the fact that stimulus is also subject to the law of diminishing returns.

    • Dominic what you are saying is that currency will eventually be worthless, and as more people realise you have to hold tangible assets

      To think they can go to negative 5%, they are deluded.

      You need to slowly get yourself out of currency eventually.

      Need to hold liquid tangible assets

      Gav said land but I’m not sure about land, I love those Art Deco Or solid 60s units in good blocks 2 levels max and 60s villa units

      • I agree move away from currency eventually as they will destroy its value. I’m still long Euro and $USD. I am thinking 10% allocation to gold. Maybe 50% bonds and hold the rest cash? Or buy a house outright soon. Just gotta find the right place. Recent $AUD drops have actually put me up $20k or close to it. All by sitting in my butt holding foreign currency against $AUD..

      • My life is gonna get simple soon – will have to spend everything on a house. Then it’s just concentrate on paying off the mortgage fast. After the stock crash (no idea when) I’ll start dollar cost averaging any spare money into stocks. And I’m going to start filling the cellar with canned food! (h/t bcnich)

      • Gav, your strategy sounds decent, methinks.

        I think we will see deflation before inflation – ie. they will deploy large inflationary measures in response to the deflation we are likely to experience – I don’t think they will go nuts before then.

        I think that a good deal of the deflation will just be the run back to the USD, resulting in USD demand and strength (DXY up), causing everything else to depreciate in nominal terms. The Yanks won’t want a USD that strong, so will try and push it down, nor will they nor will any other govt/CB want all the debt-deflation going on…..QE, MMT, etc…

        Just my thoughts about how I see it playing out.

      • Problem with houses is that when inflation kills a currency, do you think the government are going to chase property taxes based on what you paid, or what they value it at today?

        Perhaps this is partly where Bitcoin is getting its bid. Jurisdiction free.

      • The Burbwatcher: All ~200 countries in the world?

        It’d be an incredibly rare moment of unity if it happened.

        I rather think the odds of that are lower than finding a winning $100m powerball ticket stuck to my shoe.

      • I’m holding cash for now, and perhaps till end of year. If I don’t buy something soon. I’ll need to do something other than holding cash I think. For the record I’m only looking to buy a house or land based on a small or no mortgage. So up to $1m max for me at this stage. Unless the property has ability to rent out part (dual living) then I might go up to $1.1-$1.2m max for a place (if I can rent it for $300+ P/week).

        But I would not be buying if using $500-$600k to do so.. job losses are coming soon. At a scale this country has not seen in 30 years.

        Re: lax taxes etc.. only an issue for non primary place of residence. Of course council rates are another matter..

  2. How are bonds booming when the graph is heading strongly down? If someone could please explain that for me. My super account is diversified bonds and it’s been going up heaps in the last few months, I don’t understand since interest rates are going down