High Beta FX Swoons on Chinese Bank Worries

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Market Drivers for October 23, 2013
Risk aversion sweeps FX on worries over Chinese banks
BOE minutes 9-0 on QE
Nikkei -1.95% Europe -1.05%
Oil $97/bbl
Gold $1342/oz.

Europe and Asia:
AUD CPI 1.2% vs. 0.8%
GBP BoE Minutes 0-0-9
GBP BBA Mortgage Approvals 43K vs. 39.4K

North America:
USD Import Prices 8:30 AM
CAD BOC Rate announcement 10:00 AM

Currency markets were rattled by a newswire report that Chinese banks have had to triple the bad debt write offs preparing for a fresh wave of defaults in the world’s second largest economy. The news which swept through the market in midday Asia trade kept pressure on all the high beta currencies and triggered a wave of selling in AUD/USD and GBP/USD in particular.

Earlier in Asian trade Aussie rose to fresh monthly highs above the 9750 mark after Australian CPI data showed a rise of 1.2% versus 0.8%. Although the trimmed mean CPI came in line at 0.7% the news helped to boost the pair on the assumption that modest price pressures would keep the RBA from any further easing for the foreseeable future.

However, the pair quickly turned around in the wake of the Chinese banking problem news and fell more than 100 points to a low of 9621 by morning London dealing. The news out of China could quickly end the recent rally in risk FX if the problems in the country’s banking sector worsen.

China has seen an unprecedented credit boom over the past four years and despite efforts by the government to move the economy away from investment towards consumption, the country has seen little progress on that front. Indeed the real estate prices in China continue to rise prompting fears of a new bubble. A major hit to the Chinese banking sector is likely to have massive ramifications across the G-20 universe and could have a deflationary impact on global growth. Little wonder then that Aussie saw so much selling pressure in overnight trade as it will likely suffer the most from any drop off in Chinese demand.

Cable was also hit hard by profit taking dropping more than 100 points off session highs before finding some support at the 1.6150 level. The release of the MPC minutes revealed little new information with all members voting to keep QE and interest rates at current level. The BoE did note that labor market and GDP growth should improve in H2 of the year with surveys pointing to possible 1% quarterly growth. BoE appeared to be comfortable with sterling at the 1.60 rate noting that the higher exchange rate would help dampen inflation.

With no major data in US session the currency markets may consolidate today’s early moves. With US NFP data mildly disappointing and with the fresh worries about the size of the Chinese Nonperforming loans, the FX market is setting up for a correction in high beta currencies. After more than a month of uninterrupted rally, both Aussie and cable could see further selling as the day wears on with the former testing the 9600 level while the later coudl slip towards 1.6100 figure as US traders join the selloff.

Boris Schlossberg
Managing Director

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