Australian Dollar, AUD/USD, Evergrande, USD Bondholders, China – Market Alert
- Sentiment-linked Australian Dollar rally stalls as traders watch Evergrande
- USD bondholders have not yet received interest payments, reports indicated
- Evergrande default could hinder local Chinese and global economic growth
The Australian Dollar traded mostly flat during Friday’s Asia-Pacific trading hours, failing to extend gains seen from Thursday’s Wall Street session. Reports crossed the wires around 2:00 GMT Friday that holders of USD-denominated Evergrande bonds are yet to receive interest payments mere hours before the deadline. That amounts to about US$83.5 million. There was no immediate reply from the company as the world continues watching China for a potential liquidity crisis.
Market sentiment was generally on the mend in the aftermath of this week’s FOMC monetary policy announcement. On Thursday, the S&P 500 rallied 1.21% in what was the best day in about two months. There were notable increases in medium-term Treasury yields. The US 10-year rate closed at its highest since early July. This likely reflected increasing global growth optimism, underpinned by the Fed’s relatively optimistic economic outlook.
Chair Jerome Powell downplayed the risks of broader contagion linked to the Evergrande fiasco, but that doesn’t mean that markets are in the clear. It should be noted that the People’s Bank of China has been injecting liquidity into the system. The larger concern here is that an Evergrande default dominos into economy-wide turmoil locally, which may then reverberate outwards. Reports crossed the wires that China asked local municipalities to prepare for a default.
China is the world’s second-largest economy. Should the country enter a recession, that could hinder a global economy that seems to be turning the tide on Covid, with case growth around the world slowing. It should be noted that while payments may be missed, there is a 30-day grace period before the bonds default. So, there may still be room to safeguard market sentiment for now.
Below is a chart that shows upcoming Evergrande offshore debt payments. Over the past 24 hours, the company reportedly settled a US$35 million onshore coupon payment that was due on Thursday. This followed reports that it had negotiated coupon payments for its 2025 bond. It may not be surprising that the company is prioritizing local obligations, but if it only makes onshore payments, default fears could be reinvigorated.
Recent DailyFX Evergrande Articles:
- Evergrande Contagion Fears Take Over Market Sentiment, Global Stocks Dip
- AUD/USD, NZD/USD Soar on Evergrande Debt Deal, PBOC Liquidity Injections
- Hang Seng, ASX 200 May See Relief After Fed. Evergrande Set for Restructuring?
- AUD/USD, AUD/JPY Surge Despite Rising Treasury Yields, Looming Evergrande Risks
Upcoming Evergrande Offshore Bond Payments (In USD Terms)
Chart Courtesy of Thomas Westwater, Analyst
Australian Dollar Technical Analysis
The Australian Dollar broadly finds itself in a consolidative state since the middle of July. AUD/USD may have formed a rising trendline from the August low following a possible bounce off 0.7222, which is the August 27th low. The pair is facing the 0.7290 – 0.7329 inflection zone as the 50-day Simple Moving Average nears. A daily close above these, with confirmation, could open the door to near-term gains towards the early September high at 0.7478.
AUD/USD Daily Chart
Chart Created Using TradingView
--- Written by Daniel Dubrovsky, Strategist for DailyFX.com
To contact Daniel, use the comments section below or @ddubrovskyFX on Twitter
