Australia Weekly : Cowboys Down Under

The Australian dollar is left out cold for another week, used and abused as an EM hedge and then dumped with the majors – EUR, GBP and JPY to rot.

Nothing is going well for the AUD after it suffered its biggest weekly drop against the USD in a year last week. The currency assumed EM status and took another tumble this week to bring its September losses to 4.36%, just better than the Brazilian real and considerably worse than the Turkish lira.


If you had listened to the strategists on its way up eg. Morgan Stanley upping their forecast for AUDUSD to 1.00 on the back of bond demand in June and the other reports that Australia would weather the Chinese slowdown etc, you may be interested to know that the strategists are now saying that the AUDUSD correction is justified and that the target is lowered to 0.89 for end 2014 (with Qantas hoping for 0.80).

Singing a different tune to suit the occasion cannot disguise the fact that it is just a cowboy market reflecting sentiments that are fraught with uncertainty amidst market confusion on the direction of the future.

Australia has just leapt to the top of the Economic Surprise Index league tables after their amazing employments numbers even as their currency tumbled steeply to a 6 month low which is the same as the case of Norway.

CESIAUD AUDUSD* A positive reading means that economic data released have been stronger than expected and vice versa for a negative reading.

Considering that the USD has had its longest stretch of weekly gains in 47 years, we can only expect more of the same in the coming week.

And so much for the story that the Fed “dots” (from last week’s FOMC) have been raised higher, the truth is that in the past month, Australian yields have surpassed US treasury yields in their gains by quite a bit.

aud yields vs ust yields

Thus, I would think enough is enough. Unless US treasury yields are going higher to reflect the reality of the “dots”, the  cowboys only have the sentiments of fear on their side.



Meanwhile, iron ore prices lost traction as prices fell most since April this year, China bans high-ash coal imports, the World Bank, IMF and BIS all say that growth will be poor this year and Australia is starting to see food exports as the new “backbone” of their future  economy.

Moody’s Statement on Australian Iron Ore Producers
Sydney, September 18, 2014 — Moody’s Investors Service says that the currently weak iron ore price will exert a direct negative impact on its rated Australian producers over the next 6-12 months with second-order effects on a host of other sectors.
“Lower prices — combined with the general softness in prices across the whole commodities spectrum — is exercising a flow-on negative effect on several issuers and sectors across the rated portfolio, including mining services, construction, and airlines,” says Matthew Moore, a Moody’s Vice President and Senior Analyst.
Moore was speaking on the release of a Moody’s special comment, titled “Impact on Australian Corporates of Decline in Iron Ore Price”. The report notes that iron ore prices, currently around $84 per metric tonne (mt), are down considerably from the average for the six months to 30 June 2014 of around $110 per mt, which is down from an average of around $135 per mt in FY13. This is largely because of a significant rise in production capacity in Australia and, to a lesser extent, Brazil, as well as slowing demand in the key export market of China.

Australia, South Africa at Most Risk From China Coal Ban: UBS
Sept. 18 (Bloomberg) — Some producers from both nations that sell high-ash coal are more at risk, UBS analysts including Daniel Morgan say in note dated Sept. 16.
• China imported ~40-55m tons from Australia in 2013: UBS
• South African shipments to China ~13m tons last yr
• Producers selling high-ash coal may be able to upgrade through washing, or blending
• Coal may also be diverted to India, or other Asian countries
• NOTE: Coal with ash content of more than 40% and sulfur of more than 3% banned from sales and imports into China starting Jan. 1, according to regulation posted Sept. 15 on website of National Development and Reform Commission

Do note that I found that iron ore prices and the AUD strength have little quantifiable correlation.

But it still makes a good case for AUD bonds which have sold off in the past week, more than the US which is a perfect opportunity to be buying as RBA reiterated a period of rate stability in their meeting minutes.

As for the currency, price action makes little sense, especially for the AUDCAD which saw a big decoupling for the highly correlated pair. I would think a fall towards 0.97 would be a good time to load up (to target 0.99 in the medium term).


Given the strength of momentum selling, we cannot expect immediate rebounds except for potentially small corrections (AUDUSD 0.9030) as the market continues to muddle along in confusion grasping to the USD story into month end and quarter end close next week.

Meanwhile, the yields and carry remain good.

aud bonds