Aussie dollar stays steady as Evergrande fears wane
09:02, 27 September 2021
The Aussie dollar stayed steady and even gained marginally against the US dollar as fears that the crisis at Evergrande can spread to global financial markets started to wane.
During late afternoon trading in Sydney on Monday (27 September), the Australian dollar was up 0.11% versus the US dollar at 72.66 US cents. During the day, the Australian dollar had climbed to as high as 72.90 US cents before settling down.
The rebound was seen after the Australian dollar hit a three-week low of around 72.20 US cents as the Evergrande crisis was playing out last week.
Bad news priced into the Aussie
“Given the AUD is often the proxy of choice for worries over China’s economy it made sense to see the AUD/USD slip to 0.7220, a low since 24 August. But 0.7200 did not give way even when newswires reported that Evergrande missed interest payments on bonds,” Sean Callow, senior currency strategist at Westpac wrote in a note on Monday.
“Perhaps investors have already priced plenty of bad news into the Aussie, with data from the US futures markets showing large net short positions as of 21 September, around when concern over China real estate was at its height,” he added.
Despite the lack of official comments from the Chinese government, it is virtually a given that foreign investors would lose money. However, over the course of the last week, consensus among experts was that the crisis at Evergrande will not become a contagion for the global financial markets.
Little impact on Australian economy
While on an official visit to the US last week, Australian Prime Minister Scott Morrison also downplayed fears regarding the impact of Evergrande’s collapse on the Australian economy.
“When it comes to Evergrande, this is principally an issue in China, and that addresses their financial stability. The broader exposures, (according to our assessment), are largely, substantively limits its effect to China,” Morrison said.
Morrison also expects that China will address the issue and seek to contain its impact, a view that was backed by analysts.
Near term implications "limited"
“We think the Chinese government will basically step in and prevent widespread contagion. Therefore, we think the near-term implications would be limited,” Marcel Thieliant, senior Japan Australia & New Zealand economist at Capital Economics, told Capital.com.
He added that most other big developers in China are in “much better shape” than Evergrande and the overall near-term outlook for China’s property sector is “actually relatively good”.
Over the longer-term, there are concerns about the slowdown in property demand in China. If and when property sales slow down in China, Thieliant said that the mining companies in Australia will be “most exposed”.
Non-iron ore China exports shrink
He added that the trade war with China has become almost a “blessing in disguise” because Australia’s economy has become less dependent on Chinese demand as exports of non-iron ore products to the world’s second-largest economy have already fallen sharply.
David Uren, senior fellow at think-tank Australian Strategic Policy Institute, is more cautious regarding his view of how the Evergrande fallout affects Australia.
“The numbers are huge and the level of debt Evergrande has is massive. It is entirely possible that if this problem is not well managed that you can have spillovers into the Chinese property market,” Uren told Capital.com.
Aussie commodities sector exposed
He added that there could be “contagion” in terms of loss of confidence in other Chinese property developers in the global markets.
Uren also agrees that the impact of such a slowdown will be felt by the Australian resources sector. “A Chinese downturn would have significant effects across an important part of the Australian economy and investment asset class. One of the things that would soften the blow in Australia would be the likely fall of the Australian dollar,” he said.
According to Thieliant, the Australian dollar will “weaken a bit” further even though it has held up better than expected with the collapse of iron ore prices.
Aussie dollar could face pressure
“If there’s more signs of distress and a sell-off in the global stock markets, then the Australian dollar would certainly come under additional downward pressure,” he said.
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