I appeared on Channel News Asia again this morning at 6:20am SGT, via Skype. My questions and my responses in the form of brief notes are below:
Q1. China is expected to report today that its economy grew at around 7% last year, the slowest pace in a quarter-century. Will the news going to depress Asian markets?
It would be a safe bet to assume the rest of Asia will feel the effects of a significantly slower China growth. Many estimates are calling for GDP growth of a touch under 7%.
After we saw 7.3% in 2014 and are now expecting something under 7%, it is likely to send shockwaves through the market with a likely surge in volatility in both equities and currencies, especially the Australian dollar.
We are already seeing a dismal start to 2016 in equities and I don’t think China’s GDP data is going to help at all. There will be growing concerns about the possibility of a global recession with equities falling, oil at 12 year lows etc.
Q2. The Australian dollar has been punished overall by the global equity rout and the slide in energy prices. Do you see prospect of more selling of the currency?
I think for some time there has been an expectation of a lower Australian dollar throughout 2016. We are starting to see that unfold as it trades at 3 year lows under 69 US cents.
Comparisons between the Fed and RBA’s paths for 2016 certainly support that view.
If we continue to see the type of conditions we are seeing with equities falling, commodity prices falling etc, then it is reasonable to expect more selling.
Presently it is doing well to remain within reach of a couple of key levels in 69 and 70 US cents however technically I now see the A$ is likely to have problems getting back above 70 US cents so it may have entered a new environment where it will remain for the foreseeable future.
Q3. Will benign inflation and a shaky start to the year in global equity and currency markets force a cut in interest rates in Australia soon?
I am not so sure. As we know central banks tend to take a longer term of the economy rather than month to month proposition. We are also starting to see signs on inflation creeping into the RBA’s target range of 2-3%.
Over the last couple of years the RBA have been at pains to express their desire for a lower local currency and now they are getting it. They originally set their target at 85 US cents then quickly lowered it to 75 US cents. Now we see the A$ trading at under 70 US cents.
I suspect that should the A$ continue to slide, the RBA will probably be quite content to sit back and let the currency do their heavy lifting for them. This may see a change in tone from the RBA which may see reduced selling.
Q4. Is the US economy slowing and did the Federal Reserve make a mistake tightening in December?
If you look at the jobs data from the last couple of months, you would be thinking the US economy is in good shape however we shouldn’t look at data in isolation. If you look at some of the estimates, I have seen mainly in between 2-% which would almost double the Q3 growth.
I think the jury is still out as to whether the Federal Reserve moved too quickly. Obviously not many other economies are looking to tighten with the exception of the BoE.
Q5. Does the ongoing plunge in commodities mean the global economy is weakening further?
It certainly isn’t helping. I still think the biggest influence presently is China. Whilst we continue to see staggering growth from them, it is slowing which is having a significant impact throughout the world.