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Play The China Implosion: Short AUD/USD

Published 08/29/2012, 12:59 AM
Updated 07/09/2023, 06:31 AM
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We’ve been beating the short AUD/USD drum for a while now, but big macro themes can take a while to play out. We have been short the Aussie on and off a few different times over the past six months to a year, booking modest profits on some occasions and taking scratches on others. But at some point this trade will be huge. At the moment we are short from 1.05ish average price (AUD/USD) with one pyramid already.

In Hedge Fund Market Wizards Colm O’ Shea talks about how “the great trades are obvious” (see our TW writeup). This is not true of all trades – sometimes they can be totally unexpected – but it is very true in certain cases where the macro is just in-your-face compelling. In hindsight we feel strongly that shorting the Aussie will turn out to be one of these “obvious” style trades, given Australia’s extreme leverage to the China story, the commodity supercycle, the attendant down under credit and housing bubble, and so on.

Given the “obvious” nature of some of these monster trades, why do so few traders profit? A couple of reasons: For one, a lot of traders are focused on short to intermediate term time frames – which is no bad thing at all, but it means they wind up jumping in and out for small bites rather than building a big position over time and catching a monster trend by the tail. For two, it requires real trading skill to time the entry on a potentially excellent trade, even when the drivers are well known, and sometimes you have to stick with the idea for a long period of time as awareness slowly develops.

As a general rule of thumb, for instance, if you are “ahead of the curve” on a big macro idea it might take the rest of the world six to twelve months, or even eighteen months, to come around to your point of view, at which point many traders have lost interest, lost too much capital with premature entries and lack of risk control, or otherwise given up. The alternative to this problem is just to put on a big negative carry options position and wait, but that can be problematic too (ahem, Kyle Bass). Bottom line, you have to be willing to trade around your ideas, stay vigilant, and pick your spots to get traction with tight reward / risk points if you want to get a piece of these big waves.

NEWS FLOW

Some great write-ups, above, as to why the lucky country is running out of luck… Shorting a currency may seem an anti-social act, but ironically right now Australia would be helped by a more competitive exchange rate, given the ‘Dutch disease’ component of AUD/USD strength (natural resource sector crowding out the rest of the economy) and excessive inflows into Australian government bonds.

Not that we make trades with a social well being component, of course. Soros tried that with the ruble and lost a couple billion. We love Oz as a country though (great people, beautiful weather and cities) and look forward to getting back down there one of these days.

More short Oz fodder… the way to play the China implosion is through Australia in our view. And the idea that China’s new “stimulus” is going to change things is laughable… when the problem is economic slowdown because you already built way too much infrastructure you don’t need, building more of it is not going to change a damn thing. Except, perhaps, to reveal to the world just how bankrupt and logic-free your plan is… at some point the world is going to wake up to the fact that the China perma-bulls are dead wrong and that all of the stimulus hope propping up the big three (Europe, US, China) has only set up the global financial markets for an even harder fall (pun intended).

As we tweeted yesterday morning: “Zero Hedge whistling cheerfully as crash season approaches…”

Charles Evans is a dangerous idiot. It continues to boggle the mind… why are these nonsense solutions taken seriously?

As the foreman said in the Springsteen song: “Looks like these jobs are goin’, boys, and they ain’t comin’ back…” Lottery tickets are a good approximation for many boomers’ approach to retirement these days.

World watches as Danes venture below zero – FT.com

This should prove interesting. Will the negative interest rate trend catch back on? We continue to feel that expectations of runaway inflation are premature, that deflation is still what the world needs to watch out for, and that government bonds in general could come roaring back as stimulus efforts around the globe fail. The real contrarian notion here is being bullish the U.S. dollar, not bearish, and expecting a rude wake-up call for those who think the world’s central banks have done too much, with the reality being that the scale of global credit collapse means they may have ultimately done too little, or simply not had the ability to do enough even if they tried.

And in other news, grass is green and water is wet…

CHART NOTES

  • Transports flipped bearish on Monday, breaking below 200 day EMA
  • Ten year (IEF) back above 20, 50 day EMAs
  • MSCI Emerging Mkts (EEM), China (FXI) flipping bearish as well
  • Natgas back in downtrend
  • Euro pushing higher (EURUSD)
  • Still a general feeling of “topping out” for major indices
  • Higher likelihood of stupid algo games in a very light holiday week

We remain ~40% net short with profits on all positions. Not pressing in this light holiday week, have enough downside exposure for now given possibility for “algo games” (HFT programs pushing stuff around).

Significant opportunities will be coming soon enough, with September slated to be a big month. (Jackson Hole upcoming, stimulus resolution, Greek mini-finale though likely not the last, etc.)

Disclosure: This content is general info only, not to be taken as investment advice. Click here for disclaimer

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