We as investors and traders have gotten accustomed to the parallel trades in asset classes that have moved in sync for the better part of the last decade primarily influenced by a single common denominator, China. With its outsized growth prospects, insatiable demand for commodities, export driven global strength and massive capital inflows, the beneficiaries that have successfully fed the beast have experienced growth and stronger currency valuations, net inflows of capital and improved trade and revenues that propelled its gains.
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Liquidity driven growth metrics have improved and the world continues to regard the Chinese as the most influential catalyst for global demand in the coming year and the sustainable force for emerging markets. In 2013 and onward, the world will begin to see a new and fundamental shift in the Chinese economic model that will help to transform the export giant into an even greater consumption animal in the years ahead as it deemphasizes export led strength and encourages the consumption infrastructure employed by more developed nations. The wealth factor created by their adoption of the capitalist characteristics in their economy and lifestyle will redefine their balance of trade and dramatically improve the import metrics for personal consumption.
This visible but gradual evolution towards consumption will alter demand patterns many economies have enjoyed as supply driven commodity pricing will diminish and the net beneficiaries like Australia will eventually degrade their international statuses. The AUD, often viewed as the proxy currency, should decline in value into 2013 and Australian assets and their undersized bond market will garner less foreign inflows. The recent RBA 25bps interest rate cut, with further cuts anticipated, will weaken its yield advantage, sustain its 3%+ growth rate and improve competitiveness into next year as the commodity driven rally will be neutralized.
The Japanese Yen, on the other hand, with the safe haven status it is branded with, maintains a high correlation with the AUD, although for varying reasons will begin to see the makings of a sustainable downtrend and weakness as it parallels the move with the AUD. The Japanese low rate marathon will continue as further and very deliberate efforts by the BOJ will weaken the currency and help exporters pick up the slack newly created from this Chinese deficit and gradually improve competitiveness to grow out of their multi decade decline. Asia ex-Japan currencies may increase significantly against their Japanese counterpart as the JPY can fill the void as the new funding currency in an environment of currency debasement.
The year ahead will be remembered as the year of great unwinds as Mideast geopolitical tensions, commodity price volatility, and recessionary reversions with global shifts in economic infrastructures will dramatically alter the regional tides and influences of capital and trade flows that determine the importance of the asset classes we are invested in and realign their apportioned value. The highly correlated directional bias in the AUD and JPY originate from different narratives, but in 2013, both again should lead to the same conclusion.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.