Partner Center Find a Broker


“Cultured people are merely the glittering scum which floats upon the deep river of production.”
                                          Winston Churchill

Commentary & Analysis
Aussie: If it is the key risk asset currency, it may be in trouble!

I think we need only look at one chart to understand the vulnerability of risk assets fully-priced for future growth; it is the global purchasing managers’ index and it shows all the major countries turning over that the same time.

This is why we continue to believe that deflation is still very much in play–liquidation of leveraged positions is deflationary. Liquidation of leveraged positions flows into a real economy already showing weakness, further exacerbating demand, as collateral values are whacked. No rocket science here.

Interestingly today, the European Central Bank signaled its strong vigilance and a rate hike in July. Hmmm…this comes as austerity across the zone is starting to cut. Germany industrial production and exports are presently decelerating; the paymaster for the euro periphery is seeing its own growth fade a bit. If this intensifies it will provide more political headaches for Mrs. Merkel of Germany.

Is the ECB fighting the wrong battle? If they are, their actions may add to deflationary pressures and spur yet more social tensions across the zone for those locked into the straightjacket of the euro.

And one more tidbit of information to share, that could be huge if it plays out even close to the worst case scenario; it goes to the heart of the problem for China: without external demand they need internal investment to keep growth alive. I showed this to you recently with the graphic we created here: China Treadmill: Virtuous to Vicious? This tidbit comes from a front page story in today’s Wall Street Journal highlighting the global demand threat and an internal investment threat to Chinese that comes with a bursting of the property bubble which seems very much underway. Congrats to Mr. Chanos who has been very much out in front of this story; the smart get richer.

Already, in nine major cities tracked by Rosealea Yao, an analyst at market-research firm Dragonomics, real-estate prices fell 4.9% in April from a year earlier. Last year, prices in those nine cities rose 21.5%; in 2009, the increase was about 10%, as China started to recover from the global economic crisis, with much steeper increases toward the end of that year.

A downturn in property and apartment prices would harm Chinese industry and investment, and crimp consumer spending. China is a "housing-led economy," says UBS economist Jonathan Anderson, who estimates that property construction alone accounted for 13% of gross domestic product in 2010, twice the share of the 1990s.

While China’s anticipated growth is still well above that of other large economies, any reduction could have deep consequences. The global economy is now even more dependent on China for demand for anything from commodities to luxury goods, given the tepid recovery in the U.S. and Europe’s continuing sovereign-debt problems.

So, is there an indicator to confirm this slowdown in Chinese demand? If so, it may be copper.

The following chart and comments I shared with Members of our Currency Currents Professional service this morning:

A friend of mine, who is a top institutional technical analyst and one of the best, recently penned a piece to his clients, it read: Copper has left the building! He believes copper prices are going lower. He believes copper is a good global lead indicator of demand (and especially Chinese demand). I agree on both counts.

You can see the divergence in AUDUSD vs. Copper chart below:

Aussie is strong for very good reasons: growth and yield. But growth may be waning, evidenced by recent worse than expected GDP numbers and job growth. The Reserve Bank of Australia in recent comments, with their announcement the benchmark bank rate would remain unchanged, proved much more subdued than expected.

We have said many times before that Australia has become hooked to the China wagon; in fact one could say it is a satellite Chinese economic zone and why high school graduates are making near $100k a year annual salary to dig stuff out of the ground. But this benefit can sharply cut both ways should our “friends” in China disappoint.

Stay tuned.