June 26

Aussie Dollar Hit By Plunging A-Shares

The Australian Dollar has been caught in a four month long sideways range between 0.8000 and 0.7600 as price has bounced around on relative indecisiveness from the Federal Reserve on rate hikes. Recently price has coiled into an even tighter range between 0.7600 and 0.7800 for the last four weeks that is starting to look like a large bearish flag pattern. Bearish bets have been reduced to nearly flat over the last two months as positioning in Aussie is now nearly even at -4k (Jun 16th) vs -14k(Jun 9th) shorts the prior week. Given the recent pivot towards easing by the RBNZ, it makes sense to look towards the RBA as a next possible mover, especially as cracks are beginning to show in China’s stock market.

aussiecftcjune2015                                                                                AUD CFTC Positioning

Last year’s five month long range that finally broke out in early September saw a powerful and swift move lower as US rates volatility picked up and markets really began to position for FOMC rate hikes. This time around the catalyst could be a mixture of slowing Australian growth, Greek risks and an eye watering collapse in Chinese A-Shares. ChiNext fell 8% percent last night as massive amounts of margin debt taken on by rookie Chinese retail traders may finally be catching up with valuations. Much has been said about the Chinese stock bubble being the last ‘hail mary pass’ by Jingping’s government to replace growth that was lost as housing prices declined over the last year. HSBC China PMI remains in contraction territory just below 50.0 but is currently at a 3 month high. I am skeptical of this rise over the last three months as WSJ ran an article last week about Chinese factory managers shutting down their entire businesses to trade A-shares and planning to reopen their business after they “make profits”. How will HSBC PMI respond to a plunging ChiNext?
asharesjune262015                                                                         Chinese A Shares Performance

Australian GDP beat estimates in the first quarter as inventories were restocked, but this boost will not offer a lasting effect. The trade deficit is widened to -3.9bn, the largest deficit ever recorded as iron ore prices continue to fall even as new projects come online in the Australian Outback. Retail sales were also very weak in the latest report, capping off two straight months of nearly flat sales growth. The next updates of these two economic indicators will be key in deciding where the situation is headed, as labor market data is very volatile in Australia and is not necessarily the best gauge of medium term economic strength.

audtradebalancejune2015                                                                            Aussie Trade Balance

With AUD down across the board today as the NY session starts, the main factor in today’s declines seems to have been the big fall in ChiNext A Shares. This comes ahead of what is surely one of the riskiest weekends in recent years as the final final last (really) deadline on Greece agreeing to a bailout deal approaches on June 30th. If markets open on Sunday and there is no resolution, expect further declines in AUDUSD and AUDJPY.

Advertisements