Australia Focus : From Meh To Bleh
The AUDUSD continues to track Mount Everest for the month of May and we are right down to the base camp level now (and I still cannot believe Dark Knight called the high so perfectly).
There is something wrong with Australia when we have “a 26-year-old Australian woman whom newspapers reported today had abandoned her two children, aged 5 and 7, in Sydney this month to go to Syria and join the Islamic State movement”. http://www.scmp.com/news/world/article/1809023/australia-readies-law-strip-citizenship-dual-passport-terror-suspects
And now the government will have to spend A$40 mio of un-budgeted monies on new intervention programmes and community initiatives to prevent young Australians from leaving the country to join terror groups.
The likelihood of a downgrade is still in the cards even as Moody’s and S&P reaffirms the country’s ratings. But the markets are really not bothered and thus, we had a nice rally in both equities and bonds even as the currency got battered down badly in the past fortnight.
The construction sector is feeling the pinch now as construction slowed more than expected, coupled with the mining slowdown, we really do not have much to go by these days except for services. And the only bright spark is consumer confidence which is as fickle as it gets.
With rate cuts back in the cards and the RBA coming up next week, 2 June 1230pm SG time, we can expect the AUD to be in for a ride not so much that a cut this time is a foregone conclusion (indeed most expect this meeting to go unchanged), but more for the rhetoric that a future cut is inevitable.
The AUD bond trade has been profitable although the currency losses would have stripped away all gains unless you happen to be trading the AUD from NZ, Brazil or Norway.
I would hold on to the AUD for now for it’s a proxy for Asian EM like we mentioned before on account of trade ties. https://tradehaven.net/market/australia-in-focus-outsourced-to-the-world/
It looks pretty bleh from a growth angle now, with the banks engineering a property slowdown by policing mortgages on the behest of the central bank. That means the rate cut hopes will eventually materialise and the better trade would then be equities instead of bonds.
And the best hedge for the equity trade would be to sell the currency like they did for the EUR because this is now the generally accepted mindset for all. (EUR strengthened as the German bunds and DAX were sold)
As for the bonds, I do not think we shall see the 4% cash rate again for the next decade at this rate so I am looking for some long end stuff that gives a decent 5% without compromising on credit quality which means I am still hunting because there is little out there.
In conclusion, repeat after me, Buy Assets, Sell Currency. Sell Assets, Buy Currency.