AUD remains more exposed to China
After a quiet overnight session due to the Labor Day holiday in US and Canada, risk off sentiment was sparked again in Asia. Key catalyst was China sentiment turning bad again, with a miss in Caixin services PMI and a near-miss in Chinese developer Country Garden’s coupon payments.
China’s Caixin services PMI fell to 51.8 in August, its lowest levels this year, from 54.1 in July. The numbers reignited concerns that China’s services sector is weakening after last week’s official data had shown similar trends.
Meanwhile, Country Garden entered the final hours of a grace period to pay interest on dollar bonds. While the payment was eventually made, markets were not relieved as the company has a lot more US dollar debt that it will need to work through. The latest efforts from authorities to arrest the slump in the property market helped markets rally at the start of the week, but the measures are skewed to only support tier-1 and stronger tier-2 cities. Smaller locations make up more than two-thirds of the Chinese home sales, and they continue to be in doldrums. Country Garden, with its bigger exposure to low-tier and weaker tier-2 cities, may not be able to gain much from the policy support measures.
Overall, China’s measures so far are a mere relaxation of over-regulation that can stop or slow down further damage, but not particularly stimulus actions that can reverse the damage. The hustle between weak high frequency data and policy actions is likely to continue.
This led to a broad risk-off sentiment in Asia, taking the dollar back higher with AUD being the underperformer. AUDUSD slumped to 0.6420 from 0.6460+ levels at the Asia open, and the RBA announcement was a non-event. The central bank kept its cash rate unchanged at 4.10% for a third meeting in a row, while still maintaining a tightening bias, as we discussed in the FX Watch yesterday. Still, warnings on the economy and the labor market ramped up, with the statement also hinting at the increased uncertainty around the Chinese economy. But the market was left without any fireworks in typical Lowe style, at the Governor’s last meeting.
AUDUSD may see 0.64 level as the first key barrier, break below which brings the YTD low of 0.6365 in focus. Q2 GDP is out tomorrow and may confirm that economic momentum is weakening. Bloomberg consensus expects 0.4% sa QoQ and 1.8% YoY from 0.2% and 2.3% in the first quarter. Of larger concern maybe the jobs numbers next week, with RBA warning that unemployment rate may increase to 4.5% in late 2024. A sharp increase from July’s 3.7% could mean that RBA would be expected to end its rate hike cycle.
Market Takeaway: AUDUSD may target the YTD low of 0.6365 if China sentiment turnaround is not enough to clear the 0.6522 triple top.