Macro Reality: Sell AUD on break of 0,9270 on close - on SIGNICANTLY lower expected China growth post 3rd plenum

Macro REALITY.

We may need to add a new blog on Tradingfloor.com called: Macro REALITY :-) - Where only facts can be presented - The FOMC statement yday was a farce for projection for growth and monetary policy. It should have been named: 'Hope for the future' or 'Hopeless lost in Washington' Tapering is a March thing – where the political narrative fits best (Post: Debt ceiling - and budget talks and hopefully for Obama, the implementation of Obamacare)

TODAYS CALL: l SELL AUD here @ .9280 w. stop above .9800 for .8500 in Q4-2014

(*) A close below 0.9275 - the 100 SMA will confirm we have reversed down in my model

Whatever you think is the outcome politically in China there is one major conclusion which is being ignored by market:

3rd Plenum ALWAYS historically have meant SIGNIFICANTLY lower growth.

The explanation is similar to a factory moving from doing VW Golfs to producing BMW 3-series. The factory needs to close down and then reopen and bring in new tools and machinery. That's China for you. The Chinese "new model" was born in 1978- It's now 34 years old and in need of a tune up. The REAL political change - again historically - does not happen until five years into the ten year cycle, i.e.: 2019 - where the top level of the Party can change the old guard out with their own people and take a full control of the top tier Polit bureau.

My take on politics remains the same: It's about consolidating the PARTY's power not reform. They are increasing security and control at all levels. Do not forget the simple math of China. The local governments have 80% of all expenditure & expenses, but only 40% of tax receipt. The gap was land sell - what now? Uniform sales tax? Yes.....but not reform in the western world meaning of the word.

Conclusion: 

The 3rd plenum will "cost" growth - and - China model needs to be recalibrated – both of which means lower growth probably 200-300 bps in total. From 7.5% official growth to 5.5% over next two-three year.

The biggest loser: Australia. The most direct link btw commodity expansion and now slowing global demand. RBA wants lower AUD according to their latest Minutes. I agree. The equilibrium price for AUD is probably around .9000 but a .8500/.8200 is needed to kick start an economy which over the last decade not only became a "one trick pony" but also a country of expensive unit labor cost and strong unions. It's time for Australia to undo its "The Lucky one" illusion. Luck only get you so far.

CHART AUD (Source: Bloomberg LLP)

 

 

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