Talking Points:

  • Majors Rattled by Chinese Banking News
  • AUD/USD, GBP/USD Are Hardest Hit
  • Impact Could Be Felt Worldwide
  • US Traders Likely to Join the Selloff

Currency markets were rattled overnight by a newswire report that Chinese banks have had to triple the bad debt writeoffs in preparation for a fresh wave of defaults. The news, which swept through the markets in mid-day Asian trade, kept pressure on all high-beta currencies and triggered a wave of selling in AUDUSD and GBPUSD, in particular.

Early in today’s Asian session, AUDUSD rose to fresh monthly highs above .9750 after Australian CPI data showed a rise of 1.2% versus 0.8% expected. Although the mean CPI printed in line with expectations at 0.7%, the news helped to boost the Australian dollar (AUD) on the assumption that modest price pressures would keep the Reserve Bank of Australia (RBA) from any further easing for the foreseeable future.

However, the pair quickly turned around in the wake of the Chinese banking news and fell more than 100 points to hit a low of .9621 by morning London dealing. This news out of China could quickly put an end to the recent rally in risk FX if the problems in the country's banking sector worsen.

Impact Could Be Felt Worldwide

China has seen an unprecedented credit boom over the past four years, and despite efforts by the government to move the economy away from investment and towards consumption, the country has seen little progress on that front. Indeed, real estate prices in China continue to rise, prompting fears of a new bubble.

A major hit to the Chinese banking sector would likely have massive ramifications across the G-20 universe, and it could even have a deflationary impact on global growth. Little wonder, then, that the Aussie saw so much selling pressure in overnight trade, as it will likely suffer the most from any drop-off in Chinese demand.

GBP/USD Takes 100-Point Hit

GBPUSD was also hit hard by profit taking, dropping more than 100 points off session highs before finding some support at the 1.6150 level. The release of the Bank of England (BoE) meeting minutes revealed little new information with all monetary policy committee members voting to maintain QE and interest rates at current levels.

The BoE did note that labor market and GDP growth should improve in the second half of the year, with surveys pointing to possible 1% quarterly growth. Policymakers appeared to be comfortable with GBPUSD trading at the 1.60 level, noting that the higher exchange rate would help dampen inflation.

US Traders Likely to Join the Selloff

With no major US data on the economic calendar today, the currency markets may consolidate the day's early moves.

Given yesterday’s disappointing US non-farm payrolls (NFP) data, and now, with fresh worries about Chinese non-performing loans, the FX market is setting up for a correction in high-beta currencies. After more than a month of uninterrupted rallies, both AUDUSD and GBPUSD could see further selling as the day wears on, with the Aussie testing the .9600 level while cable could slip towards 1.6100 as US traders join in the ongoing selloff.

By Boris Schlossberg of BK Asset Management