Market Outlook - BNP PARIBAS - Investment Services India

This section is classified as non-objective researchin the likes of copper. However, fears of a slowdown inChina coupled with new sources of iron-ore supplycoming on tap raises concerns that iron-ore prices mayplay catch up to price declines in some othercommodities. However with significant new productionsources slow to come on stream and any interveningfall in prices likely to take out some marginal high-costproducers, we do not expect any significant near-termfall in prices. This view is contingent on there being nosharp decline in Chinese growth.We expect China’s growth to remain above 8% in2012, marking a slowdown but not a hard landing. Theslowdown in money supply growth raises concernabout the strength of investment, currently the keyengine of growth in China. We expect investmentgrowth to moderate somewhat in 2012. But if, as wealso expect, Chinese inflation continues to ease, theauthorities will likely become more aggressive in someof the selective easing measures already taking place.These will be directed primarily at improving financingconditions for firms, keeping investment elevated andwith that commodity demand.A simple model of the AUD using China’s overallimports as the dependent variable does a good job ofexplaining moves in the AUD ToT and with thatAUDUSD (see Chart 4). If Chinese imports hold firm in2012, as we expect, then AUDUSD should remain at orabove parity. QE3 from the Fed could then get uscomfortably above 1.10.A key risk to our medium-term outlook is if China wereto halt USDCNY depreciation in an effort to mitigatethe impact of a slowdown in exports to Europe, China’s1.21.00.80.60.4Chart 4 : AUDUSD actual vs. fittedActualFittedJun-99 Jun-02 Jun-05 Jun-08 Jun-11Source: Reuters EcoWin Pro, BNP Paribaslargest trading partner, which looks to be re-enteringrecession. In July 2008, when the global financial crisiswas worsening, China repegged the CNY to the USDin the context of a falling EURCNY exchange rate.From the time of the repeg in mid-July to just beforethe Lehman debacle, AUDUSD collapsed by nearly18% (Chart 3). The CNY re-peg was not the only factorpressuring AUD, but it was symptomatic of thebroader global conditions under which AUD suffered.Providing a eurozone calamity is avoided, we expectUSDCNY depreciation to continue in the context ofChina pursuing a broadly stable (trade weighted) FXpolicy. Should this view prove wrong, all bets onAUDUSD making new highs in 2012 are off.Mary Nicola 20 October 2011Market Mover52www.GlobalMarkets.bnpparibas.com