Even at US$0.70, the Aussie Dollar is a Short Seller’s Dream

The Australian dollar is trading lower against the greenback this morning. The Aussie fell a full cent, hitting a low of US$0.70. It came on the back of another rout in commodity prices.

Iron ore dropped 2% to US$56.2 a tonne. Copper prices fell 4%. Brent oil was trading at US$47.74 a barrel, down 2.4%. And zinc prices declined 1.4% to a five year low.

The cause of the retreat? The Asian Development Bank (ADB).

The ADB revised down China’s future growth prospects. It now expects China’s economy to grow at 6.8% in 2015. Previously it tipped GDP growth of 7.2% for this year.

The bank also revised down its estimates for next year, too. It had projected growth of 7% in 2016. But it’s lowered that estimate to 6.7%.

Both estimates fall below China’s own 7% targets. Yet the shift in mood isn’t surprising. The ADB is merely confirming what everyone else knows: growth is slowing faster than what the Chinese would have us believe.

Here’s the bank explaining its verdict:

Despite robust consumption demand, economic activity fell short of expectations in the first eight months of the year as investments and exports underperformed’.

Despite this, currency markets are calmer this week. Last week the US Federal Reserve kept traders guessing. Commodity currencies didn’t get the rate lift-off they desired.

The Aussie dollar should remain stable for the rest of the day.

The only economic data of note is the release of Chinese manufacturing data. That’s due to come out by midday. The PMI index will show whether factory activity is slowing. Manufacturing had stabilised in August. But whether China will maintain this momentum remains to be seen.

Better than expected manufacturing data won’t lift the Aussie dollar. At least not in the long run. If anything, it raises the likelihood of a US rate rise in November. That would put downward pressure on the Aussie dollar in the long run.

US rate hikes would send the greenback trading up. Every commodity currency would take a hit because of this. That’s good news for the Aussie dollar. A stronger US dollar improves the returns on commodity exports. And it also boosts sectors like tourism and education.

At the same time, weaker factory data could hurt the Aussie dollar. Traders may move away from commodity currencies as fear of China’s slowdown firms.

That’s no guarantee however.

The dollar already fell a cent overnight. It’s possible Chinese economic data is already priced in.

Where to next for currency traders?

Predicting the movements of currency markets is easier said than done. Particularly in such a volatile world as we live in today. It doesn’t get any easier from here. Especially when the Fed plays its game of chicken with global markets.

Then there’s China. Questions over its economy are mounting by the day. It didn’t help calm markets by devaluing the yuan, either.

Yet China’s slowdown is a given. The economy won’t bounce back overnight. It’s set for gradual decline, even if it manages a ‘soft’ landing.

Harder to predict is the timing of US rate hikes. Many believe the Fed will start lifting this year. Possibly either in November or December.

I’ve never been convinced by those arguments. I’ve maintained the lift off will begin next year. Sometime after June at the earliest. There’s too much global volatility over the next six months. The Fed wouldn’t be helping anyone by starting now.

But for traders the equation remains simple.

Rising US rates will weigh on the Aussie dollar. It could push it towards US$0.65. Or lower. A floor of US$0.60 is possible. Especially with slowing global growth forecasts.

That means traders are likely to re-establish short positions. Betting on a weaker Aussie dollar isn’t a big gamble. It’s the way most traders see things heading. But there is an alternative point of view too.

Paul Kasian is the head of asset management at Equity Trustees. He’s also hedging against the Aussie dollar. But he’s not convinced the future is set in stone. He believes China could get anxious. And that it could prompt a massive spending spree. He explains:

During the GFC, China panicked and overstimulated the economy. [We had] the biggest resources boom for that flash. If their current stimulus of dropping the [yuan] and interest rates doesn’t work, there is a risk they’ll panic and start spending money.

If the market gets whiff of that, all the commodities based currencies, of which we are one, will rally on that because everyone will assume “away goes China again”.

China is run by politicians who need to shore up their position. I’m obsessed with the fact if China was to panic and start spending, I would have to unwind my position.

‘As soon as you get wind that China starts spending, you’re better off going a bit earlier than a bit later’.

Yet China is already spending. It’s cut rates six times in less than a year. Banking capital requirements are falling. The government could take a more hands on approach with spending. But as far as capital is concerned, the taps are running freely.

The likelihood remains for a weaker Aussie dollar. Commodity prices continue their decline. Global growth is sliding. And the Fed is awaiting lift off sometime next year. It all points to a much weaker Australian dollar.

Aussie dollar down against major currencies

The Aussie dollar is down against most other currencies today. All the prices are as of 10:00am AEST.

Japanese yen: Down 0.11% to 84.99.

British pound: Down 0.01%, to £0.46.

Euro: Down 0.06%, to €0.63.

US dollar: Down 0.08%, to US$0.70.

NZ dollar: Down 0.15%, to $1.12.

Mat Spasic,

Contributor, Markets and Money

PS: The RBA left rates at a record low of 2% in September. According to Markets and Money’s Phillip J. Anderson, interest rates could remain low for a long time to come.

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Markets and Money offers an independent and critical perspective on the Australian and global investment markets. Slightly offbeat and far from institutional, Markets and Money delivers you straight-forward, humorous, and useful investment insights from a world wide network of analysts, contrarians, and successful investors.

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