Australia Focus : More Than The Iron Man

Iron Ore at 6 year lows but only the media is freaking out at under $ 60 a ton, lowest since daily record keeping began in 2009. http://www.smh.com.au/business/mining-and-resources/iron-ore-carnage-west-australian-mines-could-close-by-july-20150306-13x1ix.html

It is all about China and the first time in our lifetime that China is slowing. For China has never “slowed” and I am not sure if 7% is something to be worried about when western economies are growing in the decimal places.

Still, Australia continues to surprise on the economic data, ranking top in the world which is perhaps why the RBA left rates alone this week to the market’s chagrin and AUDUSD rose against better judgment only to collapse after the US employment numbers, closing the week still higher than their 6 year lows set earlier in Feb.

And it is decent of the RBA to release their model of AUD valuation under the Freedom of Information request by Bloomberg, suggesting that the currency was 5%  overvalued in 4Q14 against a basket of currencies and 2% over trade weighted index in Feb ! (Don’t try in Singapore). http://www.bloomberg.com/news/articles/2015-03-06/rba-says-aussie-2-overvalued-in-feb-held-by-more-central-banks

The market is now pricing in a definite cut in rates to 2% by April and another cut to 1.75% in September although bond yields have risen along with the US treasury sell off.

The question for Australia now is China or America or Europe ?

China – export market
America – USD strength vs EM basket which the AUD is correlated to
Europe – Q€ inflows on carry trades which will affect bonds more than anything

Given the risk of EM capitulation, the clear trade would be the EURAUD which is strangely still holding up, failing to break its 2 year lows set in Sep last year. Shall we see 1.38 ?

EURAUD weekly chart

AUDCAD is also surprisingly low, after Canada’s dismal economic performance.

 

Stock market looks prepped for a correction.

As for the AUD bonds, 3% is the new 5%. 5 year papers that used to entice me at 5% are now going at 3% handle, which means expectations and comfort levels have to be adjusted. Floaters to avoid at all costs especially we consider that the curve is flat till 5 years and all the rate cuts to come.

The FOMC is around the corner which would mean we could see further weakness in the days ahead which is good opportunity to buy some decent papers considering that the ECB will start bond buying on Monday and that money will take some time to flow into the southern hemisphere.

The rate cuts should materialise as the latest Intergenerational Report points to Australian living longer and being poorer over the next 40 years. http://www.smh.com.au/federal-politics/political-news/australians-to-live-and-work-longer-in-2055-intergenerational-report-shows-20150305-13vt9w.html

Not terribly optimistic prospects, I would say. But who are we comparing against ?