Ralph Shell @ 1:08 PM, Tuesday December 07 2010
The Reserve Bank of Australia kept the key cash rate steady at 4.75%, citing the need to fight pending inflation. While there has been a robust housing market, there are other indicators that this economy might be slowing. Today the AIG Construction Index was reported at 42.2, down from 44.0 in the last period. Last week we had the AIG Manufacturing Index at 47.6 below the previous period's 49.4, and the AIG Services Index 46.2 down from 50.7. The retail sales number came in at -1.1%, less than the expected 0.4%, and +0.1 percent in the previous. Quarterly GDP was reported at +0.2 versus an expected +0.5, and a positive 1.1% in the previous period.
Yes the A$ remains a favorite. In addition to the hearty 4.75% bank rate, the A$ is a crowd favorite with the speculative community holding long positions of 42,748 futures contracts according to the last COT report, because it is a commodity currency. All commodities, however, are not equal. A year to year comparison of export commodities by the RBA show Australia's prices are 44.4% compared to 47.5% a year ago. Weakened Asian demand for some of the industrial commodities is the reason for the lower prices. Is this demand going to reverse?
There are rumors this morning that China may again increase interest rates this weekend, as the consumer inflation is expected to be up about 5% in the November report. There will also be numerous Chinese reports later this week which may impact the market's short term moves.
A weekend article in the Daily Telegraph by Ambrose Evans-Pritchard indicates that deflating the Chinese real estate bubble may be difficult and the pain of a hard landing would be shared by many.
According a recent report they say:
"The Royal Bank of Scotland has advised clients to take out protection against the risk of a sovereign default by China in 2011."
"Property prices are 22 time disposable income in Beijing, and 18 times in Shenzen, compared to 8 in Tokyo. The US bubble peaked at 6.4 and has since dropped to 4.7. The price-to-rent ratio in China's eastern cities has risen by over 200% since 2004."
"Fitch Ratings has just done a study with Oxford Economics on what would happen if China does indeed slow to under 5% (growth) next year, tantamount to a recession for China. The risk is clearly there. Fitch said that private credit had grown to 148% of GDP, compared to a median of 41% for emerging markets....The result of such a hard landing would be a 20% fall in global commodity prices, a 25% fall in Asian bourses, and a fall in Asian emerging market growth to 2.5%.."
Australia is blessed with a bountiful supply of industrial as well as precious metals which the Chinese and other Asian nations need. For the longer term, a resumption in the mining boom is anticipated, but this is stale news for the market.
With both India and China now moving to tighten monetary policies, this may have a negative impact on commodity demand from Australia coming at a time when the A$ is loaded with longs. The A$ did rally back this morning to the 99 handle but now seems to be losing momentum. We want to try the short side of the A$ around this level, .9890 placing the stop up above the 1.01 level. With the Chinese economic puzzle a possible Black Swan, and the Australian economy already slowing, the A$ confronted with strong headwinds will make a move above the parity level difficult. The Aussies were the first to raise rate after the 2008 collapse, would it not be ironic if they became the first to reduce rates next year.
Author: Ralph Shell - ForexRazor Analyst - Graduated from a small Ohio liberal arts college. Graduate studies in economics and history at Duke University. Ten years experience trading cash commodities in domestic and export markets. Former commodity analyst with Merrill Lynch in Chicago. Member of and floor trader at the Chicago Board of Trade for 18 years.