Short AUD/USD (From 4-Oct to 10-Oct)
Stopped out on 10-Oct
Real-Time AmpGFX – Sold AUD/USD on China espionage story (Thu 10/4/2018 10:41 AM MT)
Sold one unit AUD/USD at 0.7575
Comment
We have been reluctant to get involved in the fast-moving markets in the last day or so following the break up in US yields, on the basis that we risk getting caught out in corrective price action.
However, we have decided to take a short position in the AUD/USD with a relatively tight stop on the basis that the Bloomberg story of alleged Chinese state-sponsored manipulation of motherboard hardware could generate significant fears for the Chinese economy.
While this story relates to events around 2014 to 2016, and major US companies have taken remedial action to remove affected IT equipment, the story has broad implication of trust for all Chinese companies.
It also adds a new layer of justification the US administration trade and investment sanctions against China. It suggests their purpose may have a bigger aim of more permanently and as completely as possible of cutting China out of the IT supply chain.
It may reflect US administration efforts to make China a strawman it can attack to improve political support in the mid-term elections. It is a remarkable coincidence that this story surfaces on the day that VP Pence delivers a speech accusing China on election meddling. And it comes not long after a clash of the US and China navy ships in the South China Sea.
China is a dominant supplier of IT hardware that cannot be easily cut out of global supply chains. In fact companies such as Apple have continued to use suppliers in China is what the Bloomberg news article describes as a kind of devil’s bargain. Apple has denied to facts in the Bloomberg story and may commercially want to maintain good relations with Chinese companies and the Chinese government. Nevertheless, the story may generate significant investor fears for the Chinese economy on the basis that its companies cannot be trusted to withstand infiltration from its own government. Companies around the world may face pressure from their customers not to use Chinese hardware. The Bloomberg story could turn out to be very big news.
Chinese mainland equity markets have been closed this week, but China ETFs trading in the US are down sharply in recent days. The AUD continues to trade as a proxy for Chinese financial and economic stability.
Supermicro, the company in the story that appears to either knowingly or unknowingly been the conduit for supplying Chinese manipulated motherboards, has experienced a share price drop of around 50%.
Position
Short one unit AUD/USD at 0.7075; s/l 0.7123; t/p 0.6823 (Capital at risk 0.49%)