We’ve noticed a divergently weak Aussie since yesterday – possibly on the Chinese clampdown measures. What’s the evidence say about Aussie valuation? Also – which way EURJPY at big inflection point?
Aussie looks relatively fairly valued versus interest rate spreads and other indicators like the copper price and risk appetite in general. It is interesting to note that AUDUSD is tracking the emerging market equity markets far more closely than the US S&P500 (which has rallied more than EM equity indices.). It is also interesting that emerging market equities and gold are in very tight correlation and one wonders if there really is any asset diversification to be had. On a completely different note, with all asset classes so hyper-correlated, is there a better measure of something “real” that can tell us what is going on. One possibility: China electricity production, which is generally considered a better measure than the official GDP figures out of China, which are more likely to be created by decree. The latest data for October suggests that electricity production growth has slowed dramatically over the last few months – far more sharply than the official industrial production data, for example. See charts below.
Chart: China Electricity Production vs. Industrial Production
Note that Chinese Electricity Production actually dipped strongly into negative territory (almost -15% YoY), while Industrial Production supposedly never dipped below a growth rate of 5-6% a year. Creative accounting is a wonderful thing, isn’t it? It’s also what is keeping the largest US banks afloat and able to hand out huge bonuses even as the risk of eventual bankruptcy grows by the day. See this great article (sorry - full article is for paying WSJ subscribers) about the real reasons behind Bernanke’s QE2 move. In it, Mr. Kessler suggests that the risks of further problems in real estate are the main drive behind the Fed’s QE2 move and that everything else being said is just a cover to distract us from the systemic nature of the problem and avoid shaking confidence. Thanks to Mr. J for the link.
Note that Chinese Electricity Production actually dipped strongly into negative territory (almost -15% YoY), while Industrial Production supposedly never dipped below a growth rate of 5-6% a year. Creative accounting is a wonderful thing, isn’t it? It’s also what is keeping the largest US banks afloat and able to hand out huge bonuses even as the risk of eventual bankruptcy grows by the day. See this great article (sorry - full article is for paying WSJ subscribers) about the real reasons behind Bernanke’s QE2 move. In it, Mr. Kessler suggests that the risks of further problems in real estate are the main drive behind the Fed’s QE2 move and that everything else being said is just a cover to distract us from the systemic nature of the problem and avoid shaking confidence. Thanks to Mr. J for the link.
Chart: China Electricity and AUDCAD
Even away from AUDUSD, which more or less followed the dip and recovery in Chinese economic activity, the Aussie has also outperformed other commodity currencies like CAD due to its more significant exposure to Asia. But a stronger Chinese slowdown is nowhere near priced into the AUDCAD cross, which continues to focus almost exclusively on interest rate spreads.
Even away from AUDUSD, which more or less followed the dip and recovery in Chinese economic activity, the Aussie has also outperformed other commodity currencies like CAD due to its more significant exposure to Asia. But a stronger Chinese slowdown is nowhere near priced into the AUDCAD cross, which continues to focus almost exclusively on interest rate spreads.
Rate spread watch: EURJPY
Interesting to note the current state of EURJPY, as rates have backed up so much in Europe relative to Japan, but the currency pair has failed to take note. EURCHF is several figures higher now despite the ongoing PIGs crisis, why not EURJPY? Another leg down in bonds and the least bit of a relief rally in the Euro on a possible Irish bailout reaction would really put the EURJPY bears’ feet to the fire.
Interesting to note the current state of EURJPY, as rates have backed up so much in Europe relative to Japan, but the currency pair has failed to take note. EURCHF is several figures higher now despite the ongoing PIGs crisis, why not EURJPY? Another leg down in bonds and the least bit of a relief rally in the Euro on a possible Irish bailout reaction would really put the EURJPY bears’ feet to the fire.
Chart: EURJPY vs. 2-year rate spreads
Chart: Weekly EURJPY
The EURJPY chart shows a bit of an upside down head and shoulders formation – a bit interesting if we get above this 115 area from a technical perspective.
The EURJPY chart shows a bit of an upside down head and shoulders formation – a bit interesting if we get above this 115 area from a technical perspective.
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