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Forex Flash: Shanghai Composite/AUD/USD correlation weakens? – UBS

According to Research Analyst Gareth Berry at UBS, “Moving away from positioning, even if we view the China risk as underpriced, the notion that major corrections in Chinese asset markets will lead to significant problems for the AUD also appear to be overblown.” It is well known that the Chinese equity market has never been the most accurate barometer for the Chinese economy (though this is changing for the better).

Monday's correction did have an impact on risk across the board, but it barely lasted a day, suggesting that the decline in the Shanghai Composite was more of an excuse for some nervous AUD longs to bail ahead of the RBA, rather than solid reason. In fact, the rolling 3-month correlation of returns between the Shanghai Composite, the Shanghai Property Index and the AUD/USD are even lower than the corresponding correlations between the currency and benchmark indices in the US and the Eurozone.

The EuroStoxx 50's correlation has been far more consistent in this aspect, confirming the AUD never really shed its risk status, only that the sovereign flow managed to set a floor for how much the currency could actually decline in any risk-off day. The AUD was never going to be best China proxy and ultimately it would be down to internal issues to determine valuations. “This story has not changed at all, and the RBA may want to take advantage of some general global stabilization to encourage the internal adjustments needed to set growth on a more sustainable footing.” Berry adds.

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