t’s difficult to be enthusiastic about the Australian dollar’s near-term prospects right now. Not only is the “battler” being pressured by interest rate differentials as traders scale back expectations for further RBA rate hikes, but China, Australia’s largest and most important trading partner, continues to whiff when it comes to its post-pandemic recovery. And that’s before we start talking about concerns surrounding the perilous financial state of some of China’s largest property developers.
Lead indicators on Chinese activity continue to deteriorate
Few will argue that initial high hopes for China’s economic reopening have failed to materialise. The early promise surrounding a household consumption boom similar to that witnessed in western nations beforehand fizzled before it began, suggesting risk aversion among households remains acute, explaining why savings rate remain elevated relative to historic norms. With a broad reluctance to spend or invest, demand for credit has been spluttering for months, acting as a reliable lead indicator for economic activity. And if the latest data for July is anything to go by, the outlook has gone from bad to worse
Chinese credit demand universally weak
If credit helps to grease the wheels of commerce, the slowdown last month suggests the world’s second-largest economy is blowing smoke. Total social financing – a broad measure of credit demand that includes financing beyond traditional bank lending – skidded to RMB 528.2 billion, down markedly from RMB 4.22 trillion in June and less than half the level expected among economists polled by Reuters. New bank loans also tumbled nearly 90%, hitting the lowest level since 2009. While seasonality contributed to the decline, other measures such as M2 growth also undershot already tepid market expectations. No matter how you sliced or diced it, the data was uniformly deemed as extremely weak, and unlikely to shift the dial in China’s battle against growing disinflationary forces.
The weak credit data points to continued downside risks in upcoming Chinese economic data, including Tuesday’s “data dump” where traders will receive fresh reads on retail sales, industrial production, urban unemployment and fixed asset investment. In turn, that data could influence China’s Loan Prime Rate (LPR) – the benchmark interest rate new existing loans are priced off – which will be released by the People’s Bank of China early next week.
Aussie dollar pessimism is factored in, but so too is China stimulus
Whether or not we see another imminent reduction in the LPR, expectations for further monetary and fiscal stimulus measures from Chinese policymakers have already been factored in by markets. While some may argue the risk of large-scale stimulus has yet to be priced, explaining a reluctance among traders to bet aggressively for further weakness in the China yuan and Australian dollar after the declines already seen. But the data has been soft for a while yet policymakers have yet to blink, unwilling to respond with the type of stimulus measures seen coming out of the GFC. Unless that changes imminently, something that appears unlikely given the longer-term economic challenges it would pose, it’s hard to argue the AUD US is anything other than a sell-on-rallies prospect. Traders will be eyeing off a test of the year-to-date low of .6458 hit in late May. A clean break of that level opens up a potential move back towards the lows below .6200 struck in October last year.
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