Market Economics | Interest Rate Strategy - BNP PARIBAS ...

Returning to EURAUD Bearish Strategies
• Initial signs of a slowdown in the Chinese
and US economies are being met by a
commitment to maintain (or even extend) loose
policy…
• …suggesting that investor confidence will
be maintained. Hence we maintain our positive
view on commodity currencies.
• We recommend taking advantage of the
euro’s current recovery to establish short
EURAUD positions once again.
• Indeed, we believe that the euro’s recent
recovery is coming to an end as optimism
regarding European rescue packages and
stress tests starts to fade.
Percent
Chart 1: Chinese Iron Ore Imports (% y/y)
versus AUDUSD
70
60
50
40
30
20
10
0
-10
AUDUSD
(RHS)
Chinese Imports of Iron Ore
05 06 07 08 09 10
1.00
0.95
0.90
0.85
0.80
0.75
0.70
0.65
0.60
Commodity currencies still favoured
Equity markets rallied following the positive start to
the earnings reporting season in the US, which has
provide a broader boost to global investor optimism,
allowing commodity currencies to resume gains.
Indeed, is interesting to note that commodity-related
currencies were the top performers over the past
week among the major currencies and we expect this
trend to continue in the near term, with long AUD
positions still our favoured strategy for the medium
term.
Source: Reuters EcoWin Pro
Chart 2: Chinese IP Looks Vulnerable to
De-Stocking
The AUD is also benefiting from positive domestic
conditions as was highlighted by the solid
employment report. Although the RBA has signalled
a pause in the tightening cycle, the strength of data
anticipated in the coming months will probably
prompt further rate hikes before the end of the year
in our view. But, the real driving force for the AUD
over the medium term will remain China and Chinese
domestic demand in particular.
Chinese data slow…
The overall growth picture from China remains
positive despite administrative tightening measures
to cool overheating sectors of the economy (as China
attempts to slow the economy to a more sustainable
pace). However, some warning signs are developing,
suggesting that a more cautious approach to the
‘China proxy’ trade may be required in the future.
One area that warrants close attention currently is
Chinese demand for raw materials and commodities.
While China’s trade surplus has continued to widen
(the trade surplus widened to USD 20.02bn in June
from USD 19.53bn in May), it is interesting to note
Source: Reuters EcoWin Pro
that the main driver of this increase was a sharp
slowdown of Chinese imports, which could be
symptomatic of a broader slowing in Chinese
domestic demand. At the headline level, the pace of
growth in imports moderated to 34.1% y/y in June,
from the 48.3% gain in May.
However, of more significance is the fact that iron ore
imports declined in both value and volume terms, as
did coal and coal ore imports. This has also been
reflected in the Australian trade data. Although the
Australian trade data show exports increasing, this is
a function of the rise in commodity prices, with
exports in volume terms stagnating. The fact that
there has been a decline in Chinese iron ore imports
Ian Stannard 16 July 2010
Market Mover, Non-Objective Research Section
50
www.GlobalMarkets.bnpparibas.com