AUD, JPY, NZD vulnerable to Chinese wobbles - Rabobank

Jane Foley, Senior FX Strategist at Rabobank, explains that growth expectations in Japan, Australia and New Zealand are very vulnerable to wobbles in the Chinese economy and the latest downgrade of China by Moody’s is likely to take its toll on these economies as well.

Key Quotes

“China’s state run press agencies reportedly failed to pass on the news of Moody’s downgrade for several hours last night.  That alone may indicate the news was unwelcome to the Chinese finance ministry, which protested that the move was based on inappropriate methodology.  That said, Moody’s announcement is not a call to arms.  The downgrade is just one notch and Chinese paper remains investment grade.  However, it is another negative signal that will serve to reinforce the message provided by a host of recent headlines regarding the risks surrounding Chinese debt.  For the economies that export heavily into China, the impact of a shock related to a bursting of a debt bubble could be grave.”

“While the Moody’s downgrade will not have come as a shock to many investors, it does provide another disincentive to inward investment.  Already the country’s strict capital controls are a concern to foreign companies.”

“It is our view that the current stability of USD/CNY would be at risk if China’s debt bubble started to give and the PBoC was forced to take drastic measures to stabilise the domestic economy.  This would risk a protectionist backlash from the US which in turn could heighten the exposure of China’s other trade partners.”

“Growth expectations in Japan, Australia and New Zealand are very vulnerable to wobbles in the Chinese economy.  Consequently, despite this year’s decent growth data we would expect the BoJ, RBA and the RBNZ to retain a cautious policy outlook.  We see scope for AUD/USD and NZD/USD to edge lower in the months ahead.  By contrast the JPY’s safe haven attraction would ensure that any wobbles in China would be translated into buying pressures.  Our central forecast is that USD/JPY will be centred around the 112 level in the coming months.  Bad news from China, however, has the potential to increase downside risk for this currency pair.”