Australian Dollar, Chinese Industrial Profits, Talking Points:
- Chinese industrial profits fell 1.8% on the year in November
- This is yet another clear sign that the economy is slowing
- The Australian Dollar took a modest immediate hit
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The Australian Dollar slipped only slightly against its US counterpart on Thursday following news of Chinese industrial profits’ first fall since December 2015.
Profits slid 1.8% on the year in November, official figures showed, following on from October’s 3.6% rise. These data are just one more indication that China’s economy was slowing further into year-end. In turn they probably increase the possibility of more stimulus from Beijing and underline the urgent need for a durable trade settlement with the US, elusive though such a thing is proving.
‘China Inc.’ already faces high financing costs, with rising credit defaults, so a turn toward weaker profitability could hardly have come at a worse moment.
The Australian Dollar can often act as the financial markets’ favorite liquid China proxy thanks to its home nation’s famed raw-material export links to the world’s second largest economy. It seems to have done so Thursday, with AUD/USD heading lower after the release.
On its daily chart AUD/USD remains in the broad downward channel which has bounded trade for much of this year. This makes a lot of fundamental sense as US interest rates have risen inexorably though 2018 while the Australian Official Cash Rate has remained stuck at its 1.50% record low since August 2016.
Even a broad rethink about the likely path of US interest rates in the coming year may not do much for the battered Australian Dollar. The Reserve Bank of Australia may still insist that the next interest rate move it makes is more likely to be a rise. However, rate-futures markets now openly beg to differ. They have changed their implicit view somewhat in the past couple of weeks. Where once they tipped unchanged rates over the next eighteen months, now they are gingerly starting to price in cuts.
AUD/USD could well move below this year’s lows if that view becomes more entrenched.
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--- Written by David Cottle, DailyFX Research
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