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The "Made in China" AUD...

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China's Australian blind spot - by Robert Gottlibsen

Let's hope the Australian business community is starting to comprehend the far reaching implications of HSBC's latest research, which shows that the chart of the value of the Australian dollar is a mirror image of Chinese electricity production. As I explained yesterday, that means the Chinese can invest in Australia and Australians in China without a currency risk...
** AUD is a commodity currency and commodities = China... it's only natural to see the direct relationship established somewhat. But beyond direct commodity supply-demand, there's a more speculative relationship, as in JPYAUD carry trades... take a look at the attached chart and see how closely the currency pair is tracking the Shanghai index.

My suspicion at this point is simply this - in time to come, with the Chinese' conscious and deliberate effort to divest their exposure in the US$ by shifting their investment into other fixed assets such as commodities, real properties, etc... at some point, the US$ grip in the global economy will loosen resulting in further depreciation in the US$, partly due to excessive supply of the US$ due to QE and partly due to a drop in demand with the Chinese shifting their investment into non US$ based assets.

At that point the US would have no choice but to depreciate their currency (like Zimbabwe did) to reduce the runaway inflation. (The current short "termish" deflationary pressure would not stop the inflation genie if the Feds were to fail in reining in their QE by the end of this year. jmv)

When that happens, I would expect the AUD to jump in sync with the RMB... once again proving to everyone what a lucky country Australia is!

But before we reach that stage, can someone please tell Krudd and his gang to stop screwing around with the Chinese please?
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Updated 30th-August-2009 at 05:40 PM by haunting



  1. haunting's Avatar
  2. haunting's Avatar
    This report seems to support some of the views expressed earlier...

    “The question is not whether the dollar will weaken over time, but how it will weaken,” said El-Erian, a former deputy director of the International Monetary Fund whose firm runs the world’s largest bond fund. “The real risk is that you will get a disorderly decline.”
    While the U.S. economy is picking up, the recovery is being driven by inventory rebuilding and Obama’s record $787 billion fiscal stimulus, Olivier Blanchard, chief IMF economist, suggested in a paper released by the Washington-based lender on Aug. 18. Neither will last, he added.

    That means exports “must increase” for a sustained U.S. recovery to take place, he said. To help achieve that, “some coordination across countries is likely to be as crucial during the next few years as it was during the most intense part of the crisis.”

    Derail Recovery

    Without that coordination, there’s a danger of a disorderly dollar fall that would destabilize financial markets and could derail the recovery, he said.

    The dollar has lost 12 percent since March 5 against an index comprising the euro, yen and four other major currencies.
    Major Risk

    The Bank of Canada is already wrestling with what to do about gyrations in the currency market. Governor Mark Carney said July 23 that the stronger Canadian dollar was a major risk to economic growth.
    Monetary-policy makers worldwide may stay in sync if forecasts of an economic recovery prove stillborn and central banks hold off on tightening credit. Economists surveyed by Bloomberg put one-in-five odds on the possibility the U.S. will relapse into a so-called double-dip recession in the next 12 months.

    David Kotok, chairman of Vineland, New Jersey-based Cumberland Advisors Inc., sees a risk of increased instability in foreign-exchange markets once policy makers start to sop up the money they have pumped into the global financial system.

    “If central bankers act without coordination, they may find their currencies hammered or upwardly valued as markets react strongly or viciously” to interest-rate differentials, said Kotok, whose firm manages more than $1.2 billion. “Foreign-currency volatility will quickly cause adjustment in interest rates in the government-bond markets of the world.”
    ** if the US$ were to drop lower from the current level, I would take that to mean the "cooperation among the central banks" to keep a "stable" US$ for the common good of recovery has broken down. Also the recent issuance of TIPS, as pointed out in this report, would serve as an early indication and warning on a devaluing US$ in a longer time frame.
  3. haunting's Avatar
    Aussie Options Turn Bearish as Rate-Rise Odds Drop

    ** worth a read and remember this - a herd is formed when there're enough people believing and sharing the same information, like a snow ball rolling downhill, it will gather momentum and mass...

    “China since the start of this month has indicated that government-backed projects will probably be fewer than in the first half and that the robust lending numbers are showing signs of slowing,” said Philip Wee, senior currency economist at DBS Group Holdings Ltd., Southeast Asia’s biggest regional bank, in a Bloomberg Television interview. “The market needs a stable U.S. and a growing China to take risk.”

    New York-based Citigroup recommended selling the Aussie against Japan’s currency on Aug. 19 on expectations it would slide toward 70 yen. The exchange rate ended last week at 78.79 yen.

    “We’ve probably built in so much positive news that the risk of disappointment is high,” said Henrik Pedersen, the London-based chief investment officer at Pareto Investment Management Ltd., which oversees $41 billion. “We’ll buy some protection through options. There’s some risk of a reversal.”
    ** one who lives by the sword shall die by the sword... the AUD shall swim and sink with the Chinese market I reckon. Next is to watch if the US$ is still retaining its safe haven status within the investing communities. At this point, the chart and short term trend is going against the above market expectations.
  4. haunting's Avatar
    Here is a good comment by DBS on currencies...

    Stock markets are unable to shake off worries that they may have run up too much
    too quickly during this recovery from crisis. In China, investors fret that the
    government may need to rein in robust lending and introduce measures to address
    potential problem loans at banks. In the major economies such as the US and
    Eurozone, investors are not convinced that the recovery is sustainable as long as it is
    dependent on government spending. Herein lies the underlying fear that exit
    strategies by central banks could lead to double-dip recessions. It did not help that
    the Bank of Israel became the first major central bank to raise its key lending rate by
    25bps to 0.75% yesterday. As long as these fears persist, the USD and JPY will find
    support from investors seeking them as safe haven. That said, many exchange rates
    have been trapped in 200-300 point ranges ever since the Shanghai Composite
    Index peaked in early August. A breakout is unlikely to come anytime soon unless
    investors decide to overcome the above worries and move equities higher, or let
    stock markets correct markedly lower on profit-taking.
    ** one way to gauge if these worries are real, one can keep an eye on the volatility of the equity market plus the currency pair movement such as JPY/AUD... my bet is they will both be volatile for a while until these worries/uncertainties are resolved. If the outcome is negative, expect a plunge from the current level.
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