If you have been following the plight of the AUD over the last few months, you would have thought it had no friends. Day after day, the financial press and the investment community found reasons why the AUD should be falling. Fed tapering – bad for the AUD. Commodity prices falling – bad for the AUD. RBA rate cuts – bad for the AUD. Chinese growth falling – bad for the AUD.
But in and amongst the gloom, the AUD still had friends. Last week’s Chinese import data clearly showed that trade with Australia had increased 19% in value terms versus a 15% fall in the AUD. Mr Wong, the invisible purchasing manager at many of China’s major commodity consuming industries, had clearly responded to the cheaper import opportunities that the weak AUD had created. This was big news to the market, but frankly it’s exactly what the market should should have expected. The AUD rose 3.5% last week in response to this ‘startling’ news.
The interesting aspect of this data is just how quickly Mr Wong was able to respond to the fall in the AUD. The so-called ‘J-Curve’ was a Keynesian belief that purchasing managers were locked in to contracts that prevented them from responding quickly to currency price changes. This theory argued that it could take months, or even years, for a currency movement to generate a balance of payments response in the right direction. The theory even suggested that a fall in the currency would trigger a worsening of the trade balance in the short-term because of these rigidities. Modern China, however, seems to be very flexible when it comes to responding with higher orders for cheaper prices. The 19% increase in trade between Australia and China with prices having fallen 15%, means that the total physical volume of trade rose by about 23%. This elasticity shows just how competitive and nimble Mr Wong intends to be when taking advantage of currency fluctuations.
At the same time, currency traders last week were reported to have record short positions in the AUD. With Mr Wong on the other side of the transaction, AUD bears should watch their backs.