DJ Forex Focus
China Will End Aussie Rally. By Nicholas Hastings
The Aussie will suffer from a China block.
On the face of it, the Australian currency should be soaring.
Unlike other G10 countries, the Australian economy has barely been hit by the global recession. And the Reserve Bank of Australia is now poised to exit its global credit-crunch strategy by hiking interest rates as early as October.
Earlier Tuesday, the RBA left its rate unchanged at a 49-year low of 3.0%but issued a statement expressing some unease at the stubborn levels of inflation.
The rise in Australian yields should make the Aussie that much more attractive against other majors, where rates are unlikely to start rising again until well into 2010, and help it to extend its gains.
However, this promising outlook for the Aussie fails to take into the account Australia's close association with China.
The commodity-dependent country is essentially what is called a 'China play' - that is, its economy relies on the strong demand for commodities from its booming northern neighbor.
The problem is that this demand from China will now probably fall.
As each week goes by, policy changes in Beijing indicate that the government there is keen to curb the strong growth that characterized China in the first half of the year.
Last week alone, the Chinese government suggested limits on steel and cement production to prevent further overcapacity while the Bank of China said its second-half lending will be "much smaller" than in the first half of the year.
The declining growth expectations for the country has been reflected in the performance of Chinese stocks with the Shanghai Composite Index falling over 15% during August.
So far, this has all had a limited impact on the Aussie.
The currency continued to trade largely sideways for most of August, hanging on to the gains that brought it up to nearly $0.85 now from $0.64 early in the year. Support came from the steady flow of strong Australian data, including last week's news that capital expenditure rose sharply rather than falling as forecast.
This has fed speculation that the RBA will now move on raising rates sooner rather than later and provided another excuse for investors to keep on buying the Aussie.
However, this enthusiasm could now be misguided.
Despite press talk of a rate hike next month, the RBA may hold back, waiting to see whether the slowdown in China starts to take a serious toll on commodity prices.
Some economists suggest that prices are particularly at risk now that Chinese stockpiling is coming to an end.
This week, rather than focusing on any positive economic news about the broader global economic recovery, the Aussie could find itself more at risk if new data from China provide more evidence of a slowdown.
Early Tuesday, the Australian dollar slipped back - falling to $0.8421 by 0645 GMT from $0.8443 late Monday in New York, according to EBS.
Elsewhere, a recovery in Asian stock prices lifted global sentiment and helped to raise the dollar to Y93.10 from Y92.98. The euro was up at $1.4364 from $1.4333 and at Y133.73 from Y133.25.
The Shanghai Composite Index, which fell a sharp 7.0% Monday, rebounded to trade 2.1% higher Tuesday with the Nikkei gaining 0.4% by its close.
On the face of it, the Australian currency should be soaring.
Unlike other G10 countries, the Australian economy has barely been hit by the global recession. And the Reserve Bank of Australia is now poised to exit its global credit-crunch strategy by hiking interest rates as early as October.
Earlier Tuesday, the RBA left its rate unchanged at a 49-year low of 3.0%but issued a statement expressing some unease at the stubborn levels of inflation.
The rise in Australian yields should make the Aussie that much more attractive against other majors, where rates are unlikely to start rising again until well into 2010, and help it to extend its gains.
However, this promising outlook for the Aussie fails to take into the account Australia's close association with China.
The commodity-dependent country is essentially what is called a 'China play' - that is, its economy relies on the strong demand for commodities from its booming northern neighbor.
The problem is that this demand from China will now probably fall.
As each week goes by, policy changes in Beijing indicate that the government there is keen to curb the strong growth that characterized China in the first half of the year.
Last week alone, the Chinese government suggested limits on steel and cement production to prevent further overcapacity while the Bank of China said its second-half lending will be "much smaller" than in the first half of the year.
The declining growth expectations for the country has been reflected in the performance of Chinese stocks with the Shanghai Composite Index falling over 15% during August.
So far, this has all had a limited impact on the Aussie.
The currency continued to trade largely sideways for most of August, hanging on to the gains that brought it up to nearly $0.85 now from $0.64 early in the year. Support came from the steady flow of strong Australian data, including last week's news that capital expenditure rose sharply rather than falling as forecast.
This has fed speculation that the RBA will now move on raising rates sooner rather than later and provided another excuse for investors to keep on buying the Aussie.
However, this enthusiasm could now be misguided.
Despite press talk of a rate hike next month, the RBA may hold back, waiting to see whether the slowdown in China starts to take a serious toll on commodity prices.
Some economists suggest that prices are particularly at risk now that Chinese stockpiling is coming to an end.
This week, rather than focusing on any positive economic news about the broader global economic recovery, the Aussie could find itself more at risk if new data from China provide more evidence of a slowdown.
Early Tuesday, the Australian dollar slipped back - falling to $0.8421 by 0645 GMT from $0.8443 late Monday in New York, according to EBS.
Elsewhere, a recovery in Asian stock prices lifted global sentiment and helped to raise the dollar to Y93.10 from Y92.98. The euro was up at $1.4364 from $1.4333 and at Y133.73 from Y133.25.
The Shanghai Composite Index, which fell a sharp 7.0% Monday, rebounded to trade 2.1% higher Tuesday with the Nikkei gaining 0.4% by its close.
1 September | 
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