Aussie Weakness Signals Diminishing Returns of Chinese Stimulus

Updated on
  • Aussie has dropped 16% since PBOC easing started last November
  • Economists predict China to lower growth target from about 7%

If the Australian dollar’s performance is any guide, Chinese monetary stimulus faces an uphill battle to reverse the economic slump that’s driven down the prices of commodities and the currencies of nations that export them.

The Aussie, used by some to express their outlook for the world’s second-largest economy, weakened immediately after the People’s Bank of China on Friday reduced its benchmark lending rate and has since failed to retest last week’s highs. It has dropped 16 percent since the PBOC began its current easing cycle in November 2014, compared with a 3.6 percent advance during the previous stretch of rate cuts.

“As far as the reaction beyond China goes, it just seems to be diminishing returns,” said Sean Callow, a currency strategist at Westpac Banking Corp. in Sydney. “Given the choice of buying Aussie and commodity currencies in the expectation that this rate cut will turn the Chinese economy around or to view it as an admission that downward pressure remains on growth, then it looks as though the weight of money is to assume the worst.”

Leaders gathering in Beijing this week to formulate a 13th five-year plan are attempting to engineer the next leg of Chinese growth driven by consumption and services rather than manufacturing and construction. During the transition, Australia is having to grapple with a decline in mining investment and commodity prices that is weakening its economy and currency.

Last week’s rate cut was China’s sixth since November and followed data showing third-quarter growth slipped to 6.9 percent from a year earlier, the weakest since 2009. More than two-thirds of 16 economists surveyed by Bloomberg expect the nation’s 7 percent growth target to be cut to 6.5 percent or less for 2016 to 2020.

Australia’s currency traded at 72.48 U.S. cents as of 11 a.m. in Sydney on Tuesday, down from 86.20 on Nov. 20, the day before this easing cycle began. The Bloomberg Commodities Index has dropped 26 percent in that period, while the price of iron ore, Australia’s chief commodity export, has fallen about 28 percent.

When the PBOC eased lending rates twice in 2012, the Aussie went from 99.27 U.S. cents to $1.0287 between June 6 and July 5, while the gauge of raw materials advanced 8.2 percent.

“If you look at the series of rate cuts they’ve done since they began the easing, it hasn’t stopped the Australian dollar declining,” said Richard Grace, chief currency and rates strategist and head of international economics at Commonwealth Bank of Australia in Sydney. “The reality of a slowing Chinese economy continues.”

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