Australia In Focus : The Summer Heat Is On

This will be a longer piece because we will be taking a break from Australia in December to concentrate on the 2015 outlooks and to relax in the spirit of the festive and feasting season. We shall continue to publish the weekly bond indicative prices for readers during this time.

Thank you for your support !

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In an uncanny parallel, Victoria state elections went the way of the party that is not Tony Abbott’s ie. Labor which is much like the way the US mid terms went earlier this month, vote for anyone else but the ….

Toxic is the word associated with Abbott and Obama and it is fashionable to be toxic like David Cameron, Francois Hollande and gang.

Therefore we swing into Aussie summer next week with the AUD dollar at a 4 year low against the USD and the Australian government carrying a record breaking debt of A$ 348 billion, up 27% in just 14 months and Abbott on record for breaking 14 of his election promises, delivering 13 and working on 11 which is actually 10 because of the Medibank IPO for A$5.68 bio last week at A$2 retail/A$2.15 inst. (closing price A$2.17), the largest in the ASX since 1997 .

Link to election promises monitor – http://www.afr.com/p/national/abbott_government_breaks_more_promises_tm2fLdNPeq6Nf0QV6c5brN

The government is still on the path of talking the currency down ahead of the RBA meeting next Tuesday (1130 am SG time), delaying some macroprudential policy actions on mortgages as well as RBA Dpty Governor Lowe’s expectation that the AUD will head lower.

Throwing OPEC into the picture, the outlook is gloomy indeed with commodities down on Friday leading the ASX to close November negative year to date, down 1.63% on  the day making it the worst performer in APAC and just slightly behind Norway in losses with the AUD, NOK and CAD competing to be biggest losers in the developed world.

More privatisations are expected along with asset sales as the government is under fire for a A$ 40 bio budget deficit (which can be attributed partly to the increase in defense spending to support Obama in the Middle East) which the Treasurer is trying to blame on falling iron ore prices (at a new 5 year low). I guess no one looked at Japan recently ?

Next up we have the Australian Securities and Investments Commission, that is whispered to be another A$ 5bio affair.

State are dumping assets too with NSW dumping about A$30 bio in electricity assets, their land office and historic buildings and Queensland to sell their pipelines amongst other state sales across the country.

Thus it should be no surprise that 10 year bonds are en route to 3% which still delivers the 2nd highest yields in the developed world after NZ, excluding Iceland and Greece.

AUD UPDATE

Asset sales and bond sales will not compensate for the mining investments that will soon collapse as we read that Fortescue (A$2.94 !! vs A$ 5.9 in Jan) will be slashing spending by half in the months ahead of the value of Australian Mining and Energy projects stagnate, showing no growth in the past 7 months, according to the Bureau of Resources and Energy Economics.

And I personally think the OECD is a little delusional to urge Australia for a rate hike earlier in the week to cool their overheating housing market because Bank of China simultaneously announced they will be doubling their AUD mortgage lending in the next 2 years to offer more home loans to endear themselves to the locals.

“Nov. 25 (Bloomberg) – Bank of China is seeking a bigger slice of a A$1.4 trillion ($1.2 trillion) mortgage market that’s almost 80 percent controlled by Commonwealth Bank of Australia and its three largest rivals. Chinese buyers overtook Americans to become the biggest foreign acquirers of Australian real estate in the 12 months through June 2013, government data show.”

Mortgages pay more than bonds for sure ! Latest issue Queensland Motorways 7Y 4.82% BBB+, issued under SunGroup Finance.

And bonds are still the way to go as we turn the heat on for summer next week. AUDJPY down as predicted into month end but the EURAUD saw a fierce uptick while the AUDCAD regained some ground after selling off earlier.

My instinct is that the AUD dollar will continue to trade on the weak side which is highly supportive of acquisitions as the Japanese and Chinese remain keen on a slice of the country’s assets .

Market positioning is not nearly as bearish as we would like to think because it is just too expensive to short the AUD these days with rates in Europe dipping into the negative.

Given the high chance we will see 0.84 next week, I would look to buy the AUDUSD at the 0.8350-75 zone and again at 0.8150, to target 0.87 in the medium term.

aud weekly chart

My medium term target for the EURAUD is 1.38 and AUDCAD is still 0.99-1.00.

And before I forget, trade recommendation from a guru in Dubai to share – AUDNZD to back up to 1.15 or thereabouts.

Leaving you with the prices (indicative)

aud bonds