The Australian dollar has fallen from 68.8 US cents on June 15 to 64 US cents this week.

That’s a drop of roughly 7 per cent — a significant drop for any currency, but especially the Australian dollar.

The benchmark stock exchange index has also fallen 6 per cent from its all-time high.

Every time a currency trader or a share investor buys or sells, there’s a reason behind it — and the millions of decisions made every day by investors tell a story. 

The story forming now is one of worry.

Concerns over the health of China’s economy are towards the top of the worry list, but there’s also anxiety around how, exactly, the interest Rate hikes announced by the Reserve Bank will ultimately affect the economy.

So, what’s going on, and who’s in the firing line?

Australian dollar tumbles

The Australian dollar’s fall over the past fortnight is a direct reflection of growing jitters about the global economy and financial markets.

Primarily, these concerns centre around the health of the world’s second-largest economy, China.

The official data makes for ugly reading.

New construction starts (or new buildings) fell 24.5 per cent in the first seven months of the year.

Property prices in some areas have “crashed”, down by 25 per cent from their October 2021 highs.

Prices are falling as demand slides, and that’s weighed against enormous levels of debt held by property developers and asset managers.

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Asset manager Zhongzi and property developers Country Garden and Evergrande are all showing signs of financial stress.

Evergrande actually filed for Chapter 15 Bankruptcy in New York on Friday, a move to protect its US assets while it seeks to negotiate with its creditors.

And in another move to stabilise its economy, China’s central bank intervened on Friday to support the local currency, the Yuan.

“China’s central bank allows the yuan to trade +/-2 per cent each day either side of its fixing rate,” Westpac senior currency strategist Sean Callow told The Drum.

“But rather than the fixing rate being yesterday’s close, adjusted for USD movement in New York trade, the PBOC [People’s Bank of China] sometimes pushes it in its preferred direction.

“So today if you want to sell the yuan, you won’t get very far before a central bank with $3.2 trillion in reserves stops you.”

China’s economic defences are up.

With the Chinese economy looking the weakest it’s been since COVID, including slipping into deflation, and as global investors hoover up the US dollar, the Australian dollar has lost favour.

“The Aussie is groaning under the weight of high US interest rates, investor angst over China’s fragile property market and the RBA’s contentment on inflation,” Callow said.

“It is in danger of sliding to 0.62, last seen in October 2022 when China doubled down on zero-COVID and US 10-year yields were around 4.30 per cent, as they are now.”

And what about the ASX?

Alongside all of this drama, Australian stocks have taken a fair bit of punishment this week.

While the National Australia Bank, Origin Energy and Telstra have all produced robust profits in the annual reporting season, the technology sector has seen significant falls.

Technology companies are particularly prone to movements in interest rates because of the debt they take on to grow.

The consensus in the market is that while interest rate rises may be nearing an end, rates are likely to stay higher for longer.

“The stock market is also reacting to the prospect of higher for longer interest rates that will most likely impact earnings,” Jamieson Coote Bonds executive director Angus Coote said.

“You also have a 10-year government bond yielding 4.25 per cent.

“It’s becoming hard to justify riskier equities when you get paid so much for high-quality sovereign bonds that have no underlying credit risk.”

What Coote’s saying is that it’s safer — for want of a better word — to make a buck on bonds now as interest rates stay elevated, prompting many to sell shares in favour of buying debt securities.

There’s a genuine move in global financial markets to seek out the safety of higher ground, or to gain financially from rising interest rates.

Interest rate hikes are biting but haven’t drawn blood

Interest rates are set to remain in what’s called restrictive territory for quite some time.

It’s in part due to the stickiness of what they call “supply-side” inflation.

Price rises on rents, gas and electricity, petrol and insurance remain robust.

You simply can’t justify cutting interest rates in an environment where inflation pressures remain, even if the data points to further softening in the economy.

What was interesting this week was the Australian Bureau of Statistics release that showed the jobs market seems to have turned.

The unemployment rate rose from 3.5 per cent in June to 3.7 per cent in July.

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Roughly 14,600 Australians had a job in June but didn’t have a job in July, but they didn’t describe themselves as “unemployed” to the ABS. There were, however, 35,600 Australians that did describe themselves as “unemployed”.

Soon-to-be Reserve Bank governor Michele Bullock said earlier this year that unemployment would have to rise perhaps, as the Reserve Bank is forecasting, to 4.5 per cent in order to bring inflation back down.

July’s unemployment data, and a view into the future from Melbourne-based recruiter Erin Devlin, show we’re slowly moving further towards that end.

“Demand for retail employees has slipped 1.4 per cent in the June quarter according to the RCSA’s The Jobs Report,” Devlin told The Drum.

“With Aussies spending less, particularly on luxury and discretionary spend, the demand for retail employees has reduced slightly.

“However due to staff shortages across many industries, demand for retail workers is still relatively high considering economic conditions.”

In short, interest rate hikes are biting, but the economy’s not bleeding just yet.

China is the wild card

Australian households amassed a total of $300 billion in savings during the pandemic, according to the Reserve Bank.

Wealthier cohorts have also gained from near-record-high property and share markets.

However, interest rate hikes are now working their way through the economy, and it’s causing more stress to households and businesses.

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A negative feedback loop would hit the economy if a sufficient number of workers’ positions were made redundant, and that led to a slump in economy-wide spending, which would further exacerbate business stress and produce more lay-offs.

We may be pushing closer to this point but we are not there yet.

At this moment in time, the health of China’s economy may be the swing factor.

Indeed, the Reserve Bank noted earlier this month in the minutes of the August board meeting that “the outlook for the Chinese economy had been revised lower and was subject to a high degree of uncertainty”.

It’s arguably now contained, but an uncontained financial crisis in China has the potential to side-swipe the capacity of both the government and asset-rich Australians to spend. It would also obliterate Australia’s export sector.

This has the potential to produce a deep local recession.

Australia has enjoyed enormous prosperity off the back of China’s economic success, but like anything else, it comes with big risks.

“For the next few months,” wrote AMP chief economist Shane Oliver, “shares are at high risk of correction [a fall of 10 per cent from the recent peak] given high recession and earnings risk, the risk of still more hikes from central banks and poor seasonality out to September/October.”

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