MRG MEGA BERJANGKA
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Australian Dollar Under Pressure On Metal Price Action, China

Posted By : MRG Mega Berjangka, Mar 12, 2014 – 21:30

Talking Points:

-AUD/USD down over 200pips since Friday’s high

-Gap lower Monday on Chinese trade data

-Event risk ahead with Employment Change figures, developments in metal markets

The Australian Dollar resumed its downtrend this week following weak Chinese trade data that indicated a $22.99B monthly deficit and an 18% YoY decline in exports. Adding to fears out of Australia’s largest trading partner, over the weekend we saw the first corporate default of a Chinese company sparking fears regarding what lies ahead. This year we will see the highest debt repayments come due for mainland companies on record and high yielding trust loans- a.k.a wealth management products (WMPs)- pose additional default risk moving forward. In addition, due to commercial restrictions between borrowers and lenders in China, companies have been obtaining additional financing over the last few years through Entrusted Loans packaged in the shadow banking sector. Those loans are listed off official balance sheet and the lack of transparency is leading to a potentially dangerous situation for the Chinese economy moving forward.

If those risks were not enough for Australia, developments in the metals market as of late have put even greater pressure on the economy. Iron ore is Australia’s largest export and (as reported by a Deloitte Access Economics director) a $1 sustained fall in iron ore prices could lead to a $300M loss in federal revenue. With the total mining sector accounting for almost 20% of Australia’s GDP, developments in the sector have a massive impact on employment prospects and therefore the labor data we will receive when the Asian session kicks off today. Note that AUD/JPY is currently the highest correlated pair intraday to price action in the S&P 500.