Risk off; AUD sinks below 0.7250 amid Evergrande concerns

AUD - Australian Dollar

An undercurrent of risk aversion dominated direction through trade on Monday, promoting a depreciation across risk assets. Equities, commodities and commodity driven currencies all fell as fears Chinese property giant Evergrande’s imminent collapse could spark a broader breakdown across financial markets. One of China’s largest property developers Evergrande has amassed debts and liabilities north of 300billion USD over the last decade, borrowing 10 fold on the back of a Chinese real estate boom. With the company unlikely to meet standard interest repayments on bonds and bank loans this week there is a fear its creditors, 200 offshore and 2,000 on shore subsidiaries will be forced to take a huge haircut on balances owed or due, the reverberations of a collapse will be felt across the global economy. Investors are keenly attuned to any hint the Chinese government will step in and rescue the property giant. On paper Evergrande is simply too big to fail and while we expect officials will step in, the scale and shape of the restructure that follows will continue to impact sentiment. A risk off vibe dominated direction through the Australasian session pushing the AUD toward intraday lows at 0.7220 before finding support and bouncing back toward 0.7250 overnight.

Our attentions remain squarely affixed to the Evergrande saga and this week’s FOMC policy update as risk sentiment continues to dominate near-term AUD direction.

Key Movers

Traditional safe haven currencies were the winners through trade on Monday with the JPY leading gains and the US Dollar index enjoying a modest 0.2% lift as risk aversion swept across financial markets. The CAD, NZD and AUD all underperformed as key commodity prices fell. Oil plunged near 2%, while copper is down 3% and Iron ore prices continue their dramatic correction. That said the days biggest looser was the GBP, tumbling some three quarters of a percent to 1.3640. With no specific catalyst on hand to spark the move it appears investors are simply squaring positions ahead of Thursdays Bank of England policy meeting and rate update, while fears a surge in Gas prices could prompt an energy crisis leading into winter and derail the countries economic recovery escalate.

Our attentions today remain with the unfolding Evergrande saga and broader risk trend ahead of Thursday’s central bank bonanza.

Expected Ranges

AUD/USD: 0.7170 - 0.7320 ▼

AUD/EUR: 0.6130 - 0.6220 ▼

GBP/AUD: 1.8680 - 1.9020 ▲

AUD/NZD: 1.0270 - 1.0350 ▼

AUD/CAD: 0.9220 - 0.9350 ▲