The AUD Trade to Start the Week
As another trading week starts, Ridge Capital Markets is taking a look at economic events and investor opportunities that this week brings.
In between the many factors that we will point out throughout the week as justifying our trade recommendations, we are paying more attention today to the USD/AUD dynamics.
Today Yellen speaks again, which is especially important considering that the extremely poor jobs figures of last week have crushed the market expectations for a June, and even for a July rate hike. This means that Yellen’s words today should give more color to what we can expect from the Fed.
As we said earlier, even before this weak US economic figure came out, at Ridge Capital Markets we did not believe that the Fed would hike in June – not in the dark, with an unpredictable Brexit referendum one week later.
Still, even if there isn’t a Fed rate hike in June or even in July, we maintain our belief that the current policy divergence of the Fed regarding other central banks is bullish for the USD. After all, while almost all central banks in the developed world are aggressively easing their monetary policies, the Fed isn’t doing that – which is good for the USD, even without near-term rate hikes.
Having said that, if we look at the USD/AUD, we believe that the USD weakness caused by last week’s shocking employment data can be profitably used by traders to build a long position that we believe can bring some very solid gains.
Take a look at Australia. With a tremendous private debt that is growing non-stop, and with a great degree of its composition being made of mortgages, Australia is sitting on a very serious housing bubble – that keeps growing, with a credit expansion that can become significantly impaired at any time.
At the same time, Australia is mostly a commodity story, and, while many investing crowds are blindly believing in a commodity bull market that they say is coming soon, we believe that the China story may well turn Australia into a nightmarish bedtime story.
After all, Australia is extremely exposed to China’s economic performance, and to the standards of commodity importing and consumption trends that China left the world addicted to over the last years.
Now, if you consider that China’s slowdown is here to stay, and that its problems when it comes to over-capacity, over-inventory, over-indebtedness, and over-leverage in its banking system are very serious bubbles that are about to pop, this means that Australia is in for a very dramatic correction – which is sure to have deep impacts on its housing-exposed credit, and, necessarily, on its currency.
On the other hand, as weakened as the US economy may be, the US is not as dependent on China as Australia (not by any means), and its economy is far more stable and diversified than Australia’s.
For these reasons, we believe that traders should opportunistically take advantage at the USD/AUD at 1.35, after its sharp correction last week, to bet on this currency pair going back to the highs of this year, at 1.44, and beyond.
In short, get ready to profit from a currency that’s going down under.