International Focus : Australia, The Unloved

I have a theory.

The AUDUSD can rise beyond reasonable expectations for prolonged periods but declines are sharp and fast because folks(hedge funds etc) cannot afford the negative carry of shorting the AUD (-2.5%) against the USD (+0.09%) for too long. That is the trading side.

Following the sharp falls, we will have a period of unloving because no one would have anything to do with it until the memory fades which, from my experience, can take about a fortnight to maybe a couple of months.

I feel slightly guilty for my ingenious call last week that the AUDUSD would collapse and the AUDCAD to 1.00 and my EURAUD did hit 1.38 too, as per my call on 30 Aug !! I have indeed surpassed my own expectations. And I feel compelled to share my little secret – it was GIC !

Yes. GIC. Not the RBA’s relentless yapping about how overvalued their currency was. It was GIC whose launch of a Melbourne CBD mall, Aspial launching a $1 bio Melbourne project and Fraser Centrepoint buying Australand. Nothing against them, of course and I have no opinion on their business decisions and strategy, except that it felt very peakish and reminded me of the time when Temasek bought ICBC last May right before the stock crashed and the Chinese story fizzled.

On the week, we have the AUD underperform every EM currency except for the Brazilian Real, almost as if it is a proxy for EM weakness which I was expecting last week. https://tradehaven.net/market/fx/fx-thoughts-the-lonely-usd-and-em-dreams/

WCRSTable : Relative performance of currencies against the USD 5-12 Sep 2014.

Well, here we are, with Australia registering the strongest employment change in history of data collected, at 121,000 jobs and its unemployment rate falling 0.2% to 6.1%, and the AUD proceeded to collapse thereafter.

aud historical chartChart : Australian Employment Change since 1978.

I think markets will take a breather on the currency next week with all the hedge funds sitting on fat profits since they started the pounding mid week. It would take a brave soul to sell at the current level AUDUSD level or the AUDCAD, for that matter.

The EURAUD has rebounded sharply to 1.4344 that is a tempting level for sellers to emerge towards a 1.4180 target. I have no view on the AUDNZD, because it is not a gentleman’s trading pair.

aud-update

It is the fear of the Fed next week and the Scottish vote and a whole bunch of other things, including Australia raising their terror alert to the second highest level of HIGH and the Australian yield curve has risen again, in line with its weaker currency, exhibiting all signs of being an EM currency rather than its developed status.

Looking at the yield curve, I think it is starting to look good and the carry is too good to miss out on for too long considering that  yields have risen 15 to 20 bp on the month.

AUD YIELD CURVE

Papers like the recent UBS 5 year AUD is giving 4.29%, Toyota Finance at 4.33% for the same tenor or Credit Suisse at 4.31%  (check out the list below).

With US treasury 5 years giving us 1.8%, the Fed will have to hike quite a bit before we see the 3% that Australia is yielding. Meanwhile, the carry costs continues to haunt.

Good luck !

2014 AUD bonds

aud bonds