Australia Focus : First Test of The Ashes

11/07/2015 by

It has not been a good week for Australian sports, with the first test of the Ashes looking quite out of reach and Nick Kyrgios bowing out of the Wimbledon in disgrace, amid allegations he threw the match away.

Rough waters too in the commodities market as Iron Ore followed the Chinese share slump to crash 10% before rebounding 10% the next day.

The RBA did nothing as expected on Tuesday and employment numbers surprised to the upside with the unemployment rate falling to 6%.

It is hard to say what will make Australia tick now as the currency came under renewed pressure, underperforming all major currencies of the world for the week, falling 1.02% against the USD, making a new 6 year low on just bleak prospects and a potential recession looming.

How should we react ? The million dollar question that is quite impossible to even guess an answer to, with their last recession 25 years back.

The IMF has given some friendly advice to the country to start spending which goes against the grain of their fiscal discipline and balanced budget approach. We can only expect more stress in the days ahead as Iron prices take a chunk out of budget planning with Iron accounting for 20% of exports.

Yet the weaker AUD is boosting services.

What I think ?

It has been short term pain for the AUD dollar (against the USD) and nothing is working their way given China, fluctuating commodity prices and housing bubbles building in the metropolitan areas of Sydney and Melbourne.

But it remains the second most expensive currency to short in the developed world, after the NZD, which means that speculators have a reason to launch attacks as rate cuts continue to be priced in. I see these sharp unexplained moves as entry points for investors because speculators simply cannot short for too long.

Using the AUDJPY, the favourite of Mrs Watanabe, fx speculator, we note that corrections are typically huge, short and sharp.

It would be easier to play the currency against the other rate-cut campers than the potential hiking Fed. And playing for the pain of carry is a good way to start.

Noting that the AUDSGD touched under parity during the week but managed to close above, I believe we have a base there and I cannot see a reason to sell the AUDSGD at its 6 year low.

Bond yields saw a sharp dip mid week before a sell off towards the close. Who would blame them for dumping to load up on Chinese stocks ?

For my view of a credit correction to come, I still believe that the high quality AUD bond market (with most issuers invt grade) will present a safe haven with yields to return for investors.

It is only the first test of the Ashes with 2 days left and 4 more tests to come …. who knows ?