Australia's Retail Sales, China: regulators try to control short-selling

Forex News and Events

RBA to meet next week (by Yann Quelenn)

Last night, Australian retail sales came in lower than expectations at 0.3% m/m but higher than last month when retail sales came in flat.

Next Tuesday, the Reserve Bank of Australia Board meets in order to decide whether there is going to be a lowering of its cash rate target from the current record-low at 2%. In addition we are also waiting for unemployment rate which had slightly decreased last month from 6.2% to 6.1%.

We think that the Reserve bank is unlikely to cut its rates at it will underpin housing bubbles. For the time being in Sydney, prices rose by 15% in a year. Hence, lowering the cash rate target below 2% would be a wrong bet. In addition, in a country where the ratio household debt-on-income is high, changing rate will have a negative massive impact.

AUDUSD is now trading below 0.7600 and is heading towards its lowest level since 2009 against a backdrop of US recovery. We remain negative on the pair and soft data over the last few months provides downside momentum to the currency.

China's stock markets plunge (by Arnaud Masset)

On June 12, the Shanghai Composite was up more than 60% since the beginning of the year while its tech-heavy counterpart, the Shenzhen Composite, gained 123% over the same period. While stock markets were printing new records every day as the People’s Bank of China eased its monetary policy further, we saw and we are still seeing no improvement in the Chinese economy.

Latest data from China show that there is still no sign of rebound as June HSBC Composite contracted for the third straight month to 50.6 while Services PMI dropped to 51.8 from 53.5 in May. A couple of days earlier, HSBC Manufacturing PMI dropped to 49.4 and confirmed that the manufacturing sector is shrinking. The PBoC is now in easing mode for almost a year and is still struggling to cushion the slowdown of the world’s second biggest economy. Last weekend, the Bank reduced both the 1-year lending rate by 25bps to 4.85% and the reserve requirement ratio for certain banks. We expect the PBoC to ease further its monetary policy in the coming months.

As expected, Chinese stock markets benefited most from the PBoC monetary policy and rallied to record highs with the Shenzhen Composite printing at all-time highs, forcing China’s securities regulator to tighten rules on margin lending earlier in May to try to limit the risks from any market bust. Nevertheless, what was bound to happen has happened and stock markets entered into correction mode (still not sure if the bubble had burst) as investors dumped stocks to meet margin calls, accelerating the sell-off. As a result, China Securities Regulatory Commission try to buoy the market last Thursday by loosening rules on margin financing. It didn’t work. Chinese stock markets are now officially in bear market and we do not recommend to buy on dip as the sell-off is certainly not over. Late on Thursday, the CSRC opened an investigation into market manipulation as it suspect that hundreds of companies suspended trading of their shares in order to avoid their stock price to drop further. The CSRC is also trying to prevent short-selling by discouraging traders to speculate on the fall of the stock market. Nonetheless, the CSRC needs to understand that the purpose of futures is for risk management and remain the primary tool used by hedgers, meaning that short-selling is actually essential. It seems that China’s regulators are trying to control the stock market in the same way the renminbi is controlled and that they only want the economic benefit of a free stock exchange and not the shortcomings.

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