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Tighter PBoC policy negative for the AUD - TDS

FXStreet (Bali) - Prashant Newnaha, FX Strategist at TDS, does not expect Chinese officials to resort to traditional easing measures, suggesting that AUD will come under increased pressure.

Key Quotes

Despite this dislocation since mid 2011, the AUD continues to move strongly in the same direction as the Monetary conditions index and AU-US spreads. If our forecasts are correct that Chinese officials are unlikely to resort to traditional easing measures, this implies by default that China’s monetary conditions will tighten further. The longer the PBoC is seen as holding off from delivering monetary relief, the greater is the likelihood that the AUD comes under increasing pressure, as the market speculates the odds of a ‘hard landing’ as rising. The read through is a negative for Australia, which should see demand for ACGBs, driving the AU-US 10yr spread down, taking the AUD with it.

Should the PBoC signal room for further easing in policy, the AUD could stage a sharp bounce, especially given how long the market is of USDs. While we believe policy action by the BoJ and ECB as more important a driver of risk sentiment right now, the charts above show it would be a mistake to dismiss a further tightening in Chinese monetary conditions and in turn the impact on the AUD.

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