Did China just end the Australian dollar bull run?

See the latest Australian dollar analysis here:

Macro Afternoon

From Friday:

Current yuan exchange rate is within a reasonable and balanced range,” the State Administration of Foreign Exchange (SAFE), China’s fx regulator, said in a statement on Friday.

“Changes in international markets could lead to more fluctuations in China’s foreign exchange market.”

“Will step up monitoring on cross border capital flows and risk assessment.”

“Will prevent abnormal cross-border flows this year.”

“China’s banks boosted 158bn USD in FX for 2020.”

“Q4 current account surplus expected to be close to Q3 level.”

This is a somewhat ambiguous statement by SAFE but it something of a warning shot across the bows of CNY bulls. As such it is very important and, if it gathers into a strong push against CNY appreciation, represents the end of the Australian dollar bull run. Why?

The AUD and EUR both track CNY:

When China is stimulating and growth is strong, capital flows into China lifting CNY. This is usually accompanied with a falling USD given Chinese growth often tracks US stimulus via exports. The astute observer will note that this is actually the opposite of what should happen but, hey, this is China we are talking about.

So, when and if China decides that CNY is high enough, and begins either jawboning or more strident efforts to prevent it going any higher, then it implicitly throws a spanner in the works for a rising EUR and AUD. This is especially the case when it happens alongside China stimulus tightening, which is also what we have now:

It’s early days, but I would go so far as to say that if China begins in earnest to prevent further CNY appreciation, which is, after all, a part of supposed rebalancing, then it throws a major spanner into the works of the entire global reflation impulse. Again, especially so when it is accompanied with a stimulus wind back, which it is:

Readers will know that I have been mulling the end of the current global reflation starting H2 this year and intensifying in 2022 for these very reasons. It is now official.

David Llewellyn-Smith
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