Australia Focus : Candle In the Wind

It’s been a bad start to the month with the Australian dollar just managing to beat the Brazilian Real, Japanese Yen and Korean Won.

As usual, it looks like Australian markets are suffering another out of body experience, tugged by China, commodities, Gold, EM, ECB, FED and BoJ.

All except themselves because the economic numbers this week has not been bad with strong retail sales for September, good employment numbers for October and RBA not easing ! All of which should be good to boost the currency which was not to be.

AUD UPDATE

The RBA warned that the economy would remain subdued which is not a bad thing and that Japanese inflows are en route. And thus the AUD crashed promptly after because to most traders, China is the key and it is unfortunately TRUE looking at the annual trade numbers below.

Australia's Trading Partners

Australia’s Trading Partners

 

Good news ahead because Australia did get the FTA with Japan going and now all that remains is China, who shall be hosting the APEC meeting next week.

Nov. 7 (Bloomberg) — Japan’s upper house of parliament approves Japan-Australia Economic Partnership Agreement.
• Australian Prime Minister Tony Abbott and Japanese Prime Minister Shinzo Abe signed the agreement on July 8 in Canberra
• More than 97% of Australia’s exports to Japan will receive preferential access or enter duty-free when agreement fully implemented
• The terms of the agreement will see tariffs on frozen Australian beef eventually cut to 19.5 percent from 38.5 percent and those on Japanese cars, household appliances and electronics abolished, according to an April statement by Abbott’s office.

Not sure if the Japanese would eat more beef than Australians buy more cars (especially with all their auto manufacturers closing down).

But it should be a good sign for AUDJPY.

Commodities will continue to be a drag on Australia with bankruptcies coming along and the big wigs in a rush to write down assets eg. Hancock Prospecting writing down $ 641 mio in coal assets and a puzzling decision by BHP to give up a stake in an US oil field as part of their cost reduction exercise, reducing CAPEX on new projects. http://www.bloomberg.com/news/2014-11-06/bhp-sheds-oil-field-deutsche-bank-values-at-450-million.html

Iron ore prices slumping to 5 year lows yet again has got hedge funds placing bets on the AUDUSD at 0.80 and it is hard to stand against that logic except that we have BoJ on our side this time.

According to a Bloomberg report, we have seen Japanese investors boost their holdings of long term Aussie bonds into Aug this year, and that trend is likely to continue as the bond yield differentials between Australia and Japan gap wider.

Yet it would be hard to see the Japanese rush to the rescue of the failing commodity companies or the next bankrupt coal power plant (http://www.businessspectator.com.au/article/2014/11/5/energy-markets/another-coal-power-station-bites-dust) and revive CAPEX back to 26.6% of 2Q GDP again (another case of over spending that I mentioned in https://tradehaven.net/market/the-oil-story-continued-where-is-the-pain/).

No, the main beneficiaries will be the banks and the bonds.

Thus bonds will remain the main beneficiaries going ahead with the AUD Bond Index showing a decent 5.7% return this year (including capital gains). The yield return is indicating a 3.87% for about 3.6 years in maturity.

Australia will continue to be the candle in the wind because the storm in commodities has just started and even when prices settle, the companies will be tottering on. And we are starting to pick up reports calling for a possible recession (a forbidden word) which would be Australia’s first in 25 years. http://www.bloomberg.com/news/2014-11-05/australia-needs-stimulus-to-avoid-recession-morgan-stanley-says.html

But I always thought they were recession proof. https://tradehaven.net/market/australia-focus-recession-proof/

All we need now is for a drought in Xmas to seal their fate (reports showing that the polar vortex is back in the US and El Nino resurfacing again).

All good news for BONDS.

In the coming week that will be littered with central bank speeches (Yellen on Wed), the markets are likely to enter into consolidation which means that I will be raising the white flag and selling AUD above 0.87 or 0.88 (if the Chinese FTA gets the nod which I am betting is unlikely).

Hedge the currency (unless you are Japanese), but hold on to the bonds.

Good luck !

AUD Bond Prices (indicative)

aud bonds