Asia Session: Tough Times Ahead For Australia

The USD has stabilised somewhat following its overnight losses on the back of Bernanke’s comments. It may have only been brief respite for the currency as a lack of headline data or market moving announcements provided little reason to shed the dollar, but this can quickly change when European markets come online, especially considering Spain is now at the forefront of investor sentiment.

The Aussie took a small dive on the back of comments from Dow Chemical Co.’s CEO Liveris when he stated there are troubling signs ahead for the Australian economy, and he even hinted towards a coming contraction for the economy. He also pointed towards Australia’s reliance on China as an underlying problem for the economy, which may have caused it to become less competitive. It was Australia’s close links to China that enabled it to escape the financial crisis of 08/09 relatively unscathed, with the massive amounts of stimulus from Beijing underpinning demand for Australian commodities.

However, there are hurdles Australia will have to overcome in order to remain competitive and avoid a prolonged period of below-trend growth. The most paramount of which is the high Aussie dollar, which, as outlined by the RBA’s Debelle this morning, is having a material impact on certain sectors of the economy. Debelle added that the dollar is not the sole cause of the current pressure facing retailers in Australia, however, it is a contributing factor. Also, as we have discussed before, the dollar is forcing structural change within some sectors of the economy, which can be costly. Furthermore, there is growing evidence that many trade-exposed sectors are feeling the sting of the dollar.

Moreover, Liveris was not wrong when he stated the Australian economy has been very reliant on China. Beijing has been the driving force behind Australian commodity demand for a long time, but the current slowdown in China is weighing on commodity demand. Although we think Beijing will be able to bring the country in for a soft landing, any kind of prolonged slowdown will have implications for commodity demand going forward. Australia, however, may be able to turn to the rest of Asia as a source of demand, which is booming.

Elsewhere, the dollar- yuan was set at a record low for the third straight day in a row. Beijing has been fairly vocal in its planes to reform its currency trading system amidst mounting pressure from the US. We don’t think, however, there will be any massive changes to China’s current management of its currency until the changeover in power is completed mid-way through next year.

Price action during the session remained fairly range-bound, with EUR/USD trading between 1.3340 – 1.3366. The Aussie tried and failed to break through 1.0550 numerous times, before testing a support level around 1.0500. It was a similar story for NZD/USD, which failed to break through 0.8240, but, crucially, managed to hold above 0.8200.

Equities in Asia benefited from the risk-on sentiment stemming from the overnight sessions, with the ASX 200 and Nikkei 225 in the green by around 0.82% and 1.58%, respectively.

Data is fairly light during the London session, but we are expecting GfK German Consumer Climate data out of Berlin at 07:00GMT – exp. 6.0 prior 6.0. Later on, consumer confidence data is due out of the US, with the market looking for 70.1 (prior 70.8).