Did Kentucky Fried Chicken Kill the Australian Dollar?

Boris SchlossbergAlmost everyone is familiar with Colonel Sanders and his magic mix of eleven herbs and spices but few people know that the company that actually owns Kentucky Fried Chicken is a food conglomerate called YUM Brands and that most of its revenue now comes from China.Yum Brands

That right. When it comes to the Middle Kingdom chicken rules while burgers drool. In China KFC is bigger than Mickey D’s with more than 4500 outlets from Shanghai to Shanxi. It is THE fast food giant in that part of the world and as such can be a very key tell into the state of the Chinese consumer.  That’s why what happened this quarter came as a shock to the market as YUM brands missed its forecast and cut its full year growth expectations markedly.

To be fair, YUM has had its share of woes in China as it stood accused of many food safety violations that have tainted its image with Chinese consumers. Still, the much sharper than expected drop in business sent off tremors amongst macro investors because it suggested that YUM’s problems may be much bigger than a few pallets of old chicken. If the Chinese consumer is starting to scale back his spending, that speaks volumes about the state of economic conditions on the ground and may be a much better harbinger of growth than the well massaged GDP figures released by the Chinese authorities.

China StocksIt’s no secret that the Chinese economy has peaked and that the massive malinvestment in real estate as well as the gargantuan corruption of the CPC itself has created a huge debt bubble in the country… just as it faces demographic and social welfare issues.

The key question is whether the Chinese policymakers can engineer a soft landing or whether the economy will effectively hit a “growth recession” as official GDP rates decline below the 6% mark.

Although 6% would be the envy of the Western world, for an emerging market economy such growth is actually not impressive especially because many analysts doubt the veracity of those numbers to begin with. This is why the YUM news could be particularly meaningful to global traders trying to make bets six months forward. As an American company, YUM’s books are far more trustworthy than anything that comes out of Beijing and therefore could be an early sign that the party is over for China bulls.China and Australia Linked

Of course nobody would be more sorry to see that happen than Australia. As the geographically closest Western economy to China and as its primary provider of iron ore, Australia has enjoyed life on the hog for the past six years while the rest of the industrialized world to suffered the aftereffects of the 2008 credit crash. The Aussie climbed as high 1.10 to the dollar and a few years ago New York streets were rife with  Australian tourists stuffing empty suitcases with anything they could purchase because things were “so cheap”.

Those days are long gone. The Australian dollar has fallen on hard times trading for only 72 cents to the US dollar as investors fled the currency over the past year on concerns over China woes. There is no doubt that the halcyon days of endless building and voracious demand for iron ore are long gone. The key question is whether China will stabilize or drag Australia down with it.

In the world of currency trading, the markets rarely stop in the middle. They usually overshoot on both on the upside and the downside, which means that the Australian dollar could have more pain ahead if the Chinese economy deteriorates. The all time low for the unit is 58 cents and I bet you won’t see too many Aussie tourists in New York if we hit those levels next year.

Until next time,

Boris Schlossberg

Mr. Schlossberg is a weekly contributor to CNBC’s Squawk Box and a regular commentator for CNBC Asia and CNBC Europe. His daily currency research is quoted by Reuters, Dow Jones, Bloomberg and Agence France Presse newswires and appears in numerous business publications and newspapers worldwide. Mr. Schlossberg has written articles on trading for SFO magazine, Active Trader and Technical Analysis of Stocks and Commodities. He is the author of Technical Analysis of the Currency Market and Millionaire Traders: How Everyday People Beat Wall Street at its Own Game, both of which are published by Wiley. Boris’ extensive experience in trading and developing momentum based techniques provide the foundation for BKForex’s strategies.