Australia, China and the Yen: What to do about the Australian dollar now?
Summary
Since late October of last year, the A$ has risen by nearly 40% against the US$. At the end of October, you had to pay US 61 cents/ A$; by yesterday, you had to pay US 82 cents, or nearly 40% more (once you factor in banks' rates).
Will this trend continue?
We link news about China's growth to the Australian dollar to give particularly non-Australian subscribers a different angle on the A$ forex rate versus the US$ and the yen. We then give you six money-earners based on this idea.
Topics Covered
- Dangerous news
- How to make money off this idea
Background
- Dangerous news
On the front page of today's South China Morning Post (SCMP) we read that "Mainland stocks approached bear market territory yesterday as jitters about the strength of the country's economic recovery drove an exodus of funds from equities." That concern of lower growth hinged on the market's acceptance that China's banks will be lending less...
Meanwhile, two pages later in the same rag we read that "It was the appetite of the Chinese for Australia's iron ore and coal that essentially rescued the country from the global recession. And that is the main reason the Reserve Bank of Australia (RBA) feels confident enough to consider raising interest rates way ahead of other developed nations."
Indeed, according to Rory Robertson, strategist at Macquarie, and quoted in this same article, "China has been the difference between growth and recession...China's dramatic stimulus...allowed Australia to record the best export performance of pretty well anyone. It also helped support Australian commodity prices at levels we barely had hoped for a few months ago."
The danger in this news is the market's perception that Australian growth is so reliant on China's. It is true that China consumes nearly 80% of Australia's iron ore exports, But surely Australia's exports of iron ore to China cannot, literally, be worth all of the tea in China, can they?
Back to perceptions; these, after all, are market realities. If the market perceives slower growth in China, this perception has to have knock-on effects concerning Australia's commodity exports to China,and thus Australian growth. So down goes the RBA's need to raise Australian interest rates. Thus, down goes the need for Australian dollars...
2. How to Save/Make Money Off This Idea
- Always consult your financial advisor first.
- Short the A$ against the US$. If you believe that Chinese growth will abate, which has been our view for some time, then Chinese imports from Australia "should" soften, and along with these, the need for A$.
- Short the A$ particularly against the yen. If you agree with our view of rising market volatility, then carry trades financed by yen have to decline, so the yen will be bought. Combining suggestions two and three - a weaker A$ vs the US$ and a stronger yen vs the US$ - implies that there is money to be made in shorting the A$ against the yen.
- Short the Chinese and thus Hong Kong equity markets, and in particular Hong Kong Exchanges and Clearing (388:HK): it is driven by the level of the Hang Seng Index, so if this is headed south, so will the share. Indeed, this share peaked at HKD 151.90 on 11th August and had skidded to $142.20 by the close of trading today in Hong Kong. We have shorted the Chinese market via the ETF, FXP:US, for some time.
