Myth and Reality – AUD

As we approach a new peak in the Citi AUD Pain index*, along with a nice top in the Economic Surprise Index**, markets are turning long in the AUD, led by the usual hedge fund suspects into the month end.

It does not matter that CNY has devalued about 2.5% since Mar this year and the slow down observed in their economic data, the AUD has appreciated almost 4% against the USD in the same time. As I write, a new 18 month record high is observed in the USDCNY at 6.2674.

It does not matter that China is on a clean up rampage, the latest being the clamp down on iron ore financing reported yesterday which means we are going to see delivery failures mounting to Aussie mines. http://www.zerohedge.com/news/2014-04-28/iron-ore-prices-tumble-china-crackdown-begins

And most importantly, it does not matter that China is Australia’s top trading partner.

And Australia is pretty important to China too.

CHINA TRADE

The principle story the economy is banking on is the internal growth which is the highly unpublicised story of very high migration – Australia has the highest population growth in the developed world, which is creating an illusion of growth in building the infrastructure to house, feed and transport the new immigrants.  http://www.businessspectator.com.au/article/2014/4/22/economy/big-australia-illusion

The auto companies closing down en masse in Australia with Toyota announcing that they too will follow Ford and Holden to quit the Australian manufacturing scene by 2017. http://www.theaustralian.com.au/business/news/toyota-to-stop-making-cars-in-australia-follows-ford-and-holden/story-e6frg906-1226822823246

BP is also closing their refinery next year which means that Australia will have to import 2/3 of their petrol and diesel. http://www.smh.com.au/business/mining-and-resources/bp-refinery-closure-leaves-australia-more-reliant-on-fuel-imports-20140402-35y4p.html

And cigarettes as well with Philip Morris exiting after 60 years. http://www.bloomberg.com/news/2014-04-02/philip-morris-to-shut-australian-cigarette-plant-after-60-years.html

Job losses are mounting. https://twitter.com/WSJ/status/438946619321765888/photo/1

When will reality bite ?

1. When reserve diversification tapers – central banks and funds around the world have been diversifying their reserves in the past year.

2. When the economic numbers start to taper in a couple of months especially with the abrupt slowdown in China

3. When El Nino strikes in June with widespread drought to be expected. https://tradehaven.net/market/fx/eating-lab-grown-meat-el-nino-and-trading-against-markets-fx-ideas/

AUD CESIAUD CPAINAUD SHCOMP

Note we are at the peak of the Economic Surprise Index and Pain Index. We would need sustained good news to keep it going such as another Woolworth’s acquisition or another Singaporean real estate foray.

Look for AUD/USD at 0.9130, 0.9045 and 0.8920.

 

* Citi Pain Index – Citi FX Positioning Alert Indicator to infer positioning of active currency traders. Positive readings sugget that currency traders are net long the currency and vice versa for negative readings.
** Citi Economic Surprise Index – measures data surprises relative to market expectations. A positive reading means that data releases have been stronger than expected and vice versa for negative readings.