Aussie problems discussion

Canvassing fundie opinions on the aussie dollar, I'm keen to get a few insights on longer-term (6month+) factors in how it might pan out. Leave the charts to one side please (we all now it's at near record highs right?). No dillweeds please.

I don't have any strong opinions but some basics that stand out are:
- foreign investors have all piled into their bonds because of the high yields on AUD. Including a lot of retail from Japan. Presumably set to continue with further yen weakening?
- Strong AUD causing problems with exporters
- Mining = Chinese demand driving a lot of growth in Aus.
- Head of Dow Chemical warned about downturn recently. http://www.theaustralian.com.au/busi...-1226311576495. He's worried about dependency on Chinese trade driving the economy. But given the Chinese economy is still going strong if slowing a little, no immediate concern?
- gold strength depreciated US dollars, appreciated AUD in turn.
- no QE in AUD so natural to appreciate relatively
- Aus recently subbed GM 1/4 billion aud to keep GM manufacturing there.

In short, it's mostly bullish for A/U but even so... something seems amiss.

Thoughts?

Missed the obvious:
http://www.rba.gov.au/monetary-polic.../06032012.html

Nothing particularly revelatory here.
"The clearest downside risk to the outlook for Australia remained a sudden worsening in the situation in Europe and its flow-on effects to the rest of the world through trade, financial and confidence channels. Members noted that a sharp slowdown, particularly in east Asia, would have significant implications for commodity prices and demand for Australian exports. "

At a glance Australia looks like a best place for investor, with AAA rating and 4.25% interest, booming of mining sector, etc.

But let's not just talk about investor side, sovereign speculator also important and they're usually the big swinger of currency. Let's say they're heavy buyer of aussie on early 2009 and mid 2010, the over stretched aussie of course concern them on 2011 when world's economy not getting recover.

Fragile level on aussie reached when it breaks parity -because it's contracting mining industry, cutting their profit- pushed by speculator runaway from euro. When almost everybody already inside the bullish train, it is easier for a pair to fall in the least resistant way which is down.

Uncertain speculator start to getting cautious, they're becoming sensitive to negative news, even the insignificant one, because they're heavily bullish and need lots of liquidity to unload their position whenever the panic selling comes.

Then, there comes RBA rate cut which increase their fear, the 300 pips after rate cut is a sign that some of them start to unload their position, but without a darker cloud there are still someone left to buy the dip and push it again around 1.0800.

The most impact was China's stalled growth which reduced their import of iron ore & coal, also talk about hard landing of China makes it worsen, addition to the equation is Japan worsening economy -which can greatly impacting China's economy- makes it a clear sign of australian declining economy.

In the local issue the data also looks negative. Retail sales growth had softened since mid 2011, with notable weakness in parts of the industry, including department stores and retailers of household goods. The housing market remained soft, with auction clearance rates in February broadly unchanged from late 2011. Also housing credit continued to grow at a slower rate than nominal income.

Not to mention that Australia passes 30% tax on iron-ore & coal mining profits, makes government clashes with BHP Billiton, not a good atmosphere for investing.

In terms of monetary policy, everything seems AUD positive relative to other currencies.

I suppose my thoughts are that most of the positives for the AUD are already priced in.

Australia basically missed the GFC, so everything seems hunky dory around here (unless you are dealing with the ridiculous cost of living brought on by the mining boom/real estate bubble).

From a transmission point of view, it makes sense to me that a country like Australia will be one of the last to face a meaningful slowdown. A slowdown and housing crash in the US/EU debt woes takes a while to transmit completely to an economy like China, but now China's property bubble seems to have begun deflating or bursting (not sure yet)... But they are still demanding huge commodity exports from us, and commodity prices have been relatively buoyant.

If China does face a crash/bubble bursting (debatable), then suddenly Australia is not such a great place to invest. Our manufacturing has been gutted as we have gone "all in" with the mining sector with the expectation that China continues growing at an incredible pace, and if that stops the carry trade is likely to unwind again as commodity prices crash.

The questions are:

Have all the positives been priced in already?

And are sophisticated investors seeing a China slowdown as likely?

There are plenty of bubbles yet to burst properly, Chinese, Canadian and Australian housing bubbles are 3 possibilities, and if the positives are already priced in, that leaves only rate cuts, demand falls and bubbles bursting.

This is probably not a very academically supported view, but my basic view of the chain of events is thus:

US (Consumer) crashes ---> China (Producer) crashes ----> Australia (Supplier) crashes

I think people will eventually realise that the recovery in the US is not real, and that China cannot keep growing indefinitely at previous rates, so eventually debt expansion (for real estate etc) collapses in Australia and we get our first real recession in a long time as people discover that their house in the outer suburbs is not worth $1,000,000 and household wealth takes a reality check.

Anyway, just some opinions, I'm by no means an expert.

several factors:

1, speculative positions,As shown in CFTC report, market is still long, carry trade fade a little but any dip still attract buyers.

2, World economy prospect, especially China, as China is the biggest export country to Australia. I think China's soft-landing story still running and will it face reality check, maybe at second half of this year.

3, Monetary policy, RBA actually has nothing to do with the exchange rate unless they endorse the way of SNB or BOJ, as every developed countries or area are trying to devalue their currency.

So in the end it's left to sentiment change. When the bulls in risk market realized that everything they saw so far just a correction and find ways hard to exit.

Overall I am bearish to AUD, but for the time being when EUR, SP500 still in net short positions, not the best time to short.

Your opinion is good, which could give me lots of help.

If people posted like you three all the time, this place would be golden. Thanks for your considered replies. Alright so:
ZKF: Agreed spec market is net long. Re RBA there is a lone voice suggesting QE happened, although this appears a bit Zero Hedgish in its evidence: http://radicalexpectations.com/qe-happened-in-oz

Halifax: those are the kind of views which are worth more than you think. The chain is complicated because Chinese is a user as well as supplier so the overall commodity market is the one to watch as you say ... which brings on to

Assassin: Bingo. I wasn't aware of the 30% tax, which is huge news from last week http://www.bbc.co.uk/news/business-17441170

Given the tax comes in 1 July, Oz tax year is end of June, it'd make sense for mining companies to book as much profits as possible in the next few months, flooding market with AUD and flowing into RMB/USD/CHF safe havens etc.

It's been on the cards for a while true, but now it's official, it would make sense to take action. Can anyone fault this?

Plus this (from indianguy over @ taf). I'm missing way too much of this kind of thing:
http://www.reuters.com/article/2012/...82R06Y20120328

Suggests metals are temporarily over-inflated at the moment too.

The eye of aussie player obviously on China now, a slowdown on growth spark an easing policy view & finding a way to avoid hard landing. China's government will focus on curbing inflation & decreasing bubbles especially on property price & industrial sector expansion.

Even the soft landing still going to damage demand of metal & energy resources from China, makes Australian mining industry impacted significantly. When lowering price of metal & energy commodities happen, plus high profit tax implemented by Australian government mixed together, it can crush mining industry profit and eventually will affecting Australian growth.

Condition can change by development in europe condition, whenever they recover, business will grow again, demand of product from China increasing again. That's why China watching closely on Europe condition & ready to support Euro area anytime -obviously China do that for their own sake-

For Australia, I think they can't do much because they're in the third tier of world's business cycle. One way to avoid recession is by the diversification of nation's income, they must grow not to depend too much on mining industry as their pilar, because it's a fragile single pilar supporting the nation's growth and can break easily whenever world's economy comes to recession.

True. Oz shouldn't put all their eggs in the mining basket but they will, just as UK did with the banking sector. It's too appealing for politicians. All short term gain at long term expense.

I don't look for long term plays that often, but there's been some v/ heavy long term flows on AUD. Now I'm convinced this is profit locking with price capped at announcement high 10556 till end june. Only one way to find out...

My view of aussie still heavier on bearish side, yes it is makes sense when BHP, NewCrest, Rio Tinto and the likes will book some significant profit before the tax implemented. From my deeper thought I think the tax -if it will be implemented just as smooth as the plan- is one way of "australian easing" strategy, it will drive the flow from mining to retail sector and ease the pressure of inflation.

RBA will likely to wait the tax implementation and see how the real impact happens before they decide to cut the rate, so I think nothing will be happening this April except the speculator push for aussie to go higher to meet commercial -miner- offer, may be above 1.0500.

Before RBA giving a bold act, speculative rumors will be flowing and will likely going to swing aussie in ranging mode for a while between large bid below 1.0300 and large offer above 1.0500

Pretty similar read Assassin, though for the reasons above and more I'm short where I can for a long-term compounder.
I've moved down to around 520/30 tops, not sure if we'll see it mind. Barriers @ 3000 at the moment will keep the range for a while.

What is the alternative?

I agree it is not smart to put all your eggs in one basket but you appear to be giving the government far to much credit for the Australian business environment. My view is that the government deals with the cards it is given, not determine what sectors are going to be the strongest in the economy.

Manufacturing in developed countries is not competitive and I don't know what the next growth industry in Australia will be but as mining investment is growing we just have to ride the wave that has at least 20 years more to play out.

The Aussie is hog-tied to equity markets, and I don't see much happening in its movements other than following the equity markets in a correlated fashion. Mining investment is expanding and although a large hit in commodity prices will subdue the Aussie, overall the sector is robust and will provide us with protection from the upcoming euro breakup. Though that eventuality would drag us possibly into the low 90's.

Sary, if Oz puts aside money sensibly and doesn't buy off their electorate in times of plenty you are holders of some of the finest politicians in the world. In the UK, we had no such luck.
I'd agree global demand drove mining in Oz, but equally policy drives business - manufacturing in Germany is the powerhouse of the Euro for example. UK financial sector etc etc.

Upcoming euro breakups and low 90s sound like predictions to me, I can't comment as I steer well clear.

News is solidly bearish at present:
Oz Approaching fed debt limit:
http://www.businessspectator.com.au/...20120409-T7Q6H
... and this is when things are going well. Sounds like the foundations of QE to me.

I tried to find any chinks in the chain, and this is all I've got:
http://ftalphaville.ft.com/blog/2012...t-your-friend/
not entirely convincing argument for aud keeping at the $1ish level for the year ahead.

Read between the lines of this, the RBA statement last night (where they cut 50bps)

"The exchange rate remains high even though the terms of trade have declined somewhat.

Read more: http://www.news.com.au/business/brea...#ixzz1tbskclmK

RBA ain't propping it up, but someone is. Unwind slowly slowly slowly.

Just like I thought, RBA actually cut the rate, but looking to market reaction I'm sure the bid around 1.0300 and below from sovereign & exporters still thick & starting to soak the order board.

One thing for sure, that 50 bps cut is not creating panic selling..... Well, may be most traders thesedays begin to evolve into highly informed traders and drastically eliminate the "variable of emotion" outside their trading environment.

Agree - there should be an almighty sell off for 50bps, but it's been properly dampened. Although we're pretty much 300p down from where I started this, I suspect that the moves will be fairly muted till end June.
Keep selling the highs rinse and repeat.

97 cents to USD is possible medium term, but I doubt we'll see lower than that in the next year or so.

The upside looks locked in below USD1.10 in my opinion because a AUD that high guarrantee's job losses in manufacturing in Oz, and that will only trigger further interest rate cuts in my opinion (interest rate cuts = lower AUD).

The first rate cut by 25 bps last year shake the price down 300 pips, and now with 50 bps cut I only saw hesitation of specs unloading more of their long position. I need to see next COT data first to determine specs background, of course I've short aussie higher couple of times before, but this stubborn bid below 1.0300 reminds me to euro, with so many negative fact, euro still can hanging around above 1.3000 by the help of sovereign bids.

Of course 1.1000 is not a shining level with latest condition of australia, but if the bids below 1.0300 is not canceled by sovereign player for any purpose I'm afraid we can only see a ranging mode for quite long time just like loonie did from early 2012.

Iv never studied economics & my fundamental knowledge is next to nothing...here goes:

USA has 15 trillion debt that doesn't look it can be paid overnight, best to inflate some of that debt away, hence rates will be kept low & pray the economy kickstarts...but USA is consumer industry so without job creation, little consumer spending, little reason to increase rates...
China may not be expanding in double digits but still has a fair few infrastructure projects to keep Aussie going for a few years...so carry trade wise there isn't any reason for Aussie to fall below parity unless the US drastically starts improving and the latest figures show that isn't happening...

All these people cashing in their longs will want to put their money into something and right now where r u gonna get a return of greater than 4% ESP with stock markets at their highs...unless they are cashing out in preparation for a crash and to buy low