George Lucas, Raiz Group CEO
China is in the spotlight this week. The Asian superpower’s economy is likely to continue to slow in the coming months which will be a headwind for commodity-linked currencies like Australia, Indonesia, and Malaysia over the next couple of years. Remember, I am not saying China will cease growing, but that the growth rate will not be as high as in the past, and that this will have knock-on effects.
Looking closer, the latest activity data out of China emphasises just how much the country’s economy has continued to slow. This includes sluggish refining activity and retail sales numbers released earlier this month. While some of the latest loss of momentum in China is probably due to fresh virus-related restrictions, sectors less impacted by COVID-19 have slowed too.
Adding to the China picture are tighter credit conditions from authorities that continue to bite and suggest the economy will continue to slow, even if the virus-related weakness eventually unwinds.
A sustained slowdown in China will contribute to further underperformance on the part of China’s stock market. While this should not stop the global rally in stock markets, it may have an impact on the prices of commodities, particularly industrial metals such as iron ore, coal and copper.
Looping back to currencies, the slowdown’s impact on commodities is likely to weigh on the currencies of economies where commodity exports are particularly important. Hence, I expect the Australian dollar, Indonesian rupiah and Malaysian ringgit to continue to remain weak against the US dollar.
The caveat to all this: we didn’t see surging appreciation in these currencies on the back of strong price rise in commodities, so we may will not see massive weakness if commodity prices keep falling.
Thailand GDP surges 7.5% year on year
Elsewhere in Asia, Thailand’s economy grew 7.5% year on year in the three months to June, its first expansion in six quarters. The surprise 0.4% quarter-on-quarter rise in Q2 GDP is unlikely to be repeated this quarter considering the surge in virus infections and slow vaccine rollout in Thailand.
The growth in large part reflects a rebound from last year’s sharp decline, and the tourism sector in Thailand is still on its knees, meaning any recovery further ahead will probably be slow.
Australia’s wage price index ticks up
In Australia, the subdued 0.4% quarter-on-quarter rise in the wage price index in Q2 underlines that the tight labour market hasn’t been generating significant wage pressures.
On this front, the lockdowns did not cause employment to decline in July, and the unemployment rate continues to fall as people report that they are not looking for a job. The jobless rate dipped from 4.9 per cent in June to 4.6 per cent in July. There’s not much point job hunting in a lockdown.
US Federal Reserve hints at asset purchase tapering
In the US, it now looks more likely than not that tapering of bond purchases by the US Federal Reserve will begin later in 2021, rather than early in 2022, as most had previously thought.
The final decision on whether that will happen is unlikely to be taken before September after the prospect was reinforced by the release last week of minutes from the US Fed’s July meeting.
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