FX Tools: AUD weakness and EURJPY outlook
John J. Hardy, FX Consultant, Saxo Bank
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.