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CashBackForex - Often Imitated, Never Duplicated!
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Will the Carry Trade Continue to Favor Australia?
Submitted by Ralph Shell
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10:26 AM Sep 18 2012
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2658 Views |
0 Comments
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 (7 Votes)
In late August we looked at the Aussie Dollar and thought it was due for a sell-off, and it did for a modest couple hundred points. Then it turned around and rallied from 1.0165 to a high of 1.0624. It has since backed off from the high, but remains above the 1.04 handle. Where do we go now?
Part of our analysis in late August was based upon a longer term fundamental view that the global economy was slowing, as was the demand for iron ore, Australian biggest earner of Aussie Dollars. Further the A$ was, and is richly priced, making it difficult to export other Australian products.
Also, the late August COT report showed the specs were long 98.1K futures contracts, a big commitment. Usually going into the expiration of a futures contract, there is liquidation of positions. This meant the big long position might weigh on the market. There has been some reduction in the OI, but it is still big, with the specs were still holding onto 75.5K contracts, according to the last report.
The turnaround in the A$ during September was caused when the Central Banks in China, Europe, and the US all decided it was time for some stimulants. China intends to do this with infrastructure projects, Draghi, at the ECB, will have the European version of quantitative easing, a version that gives those in Frankfurt and Berlin supervision rights over the wayward debtor countries. Next, Fed Chairman Bernanke, not to be upstaged, decided to expand the Fed balance sheet and print $40B every month until the US unemployment comes down. The philanthropic Bernanke continues, offering nearly free money until
sometime in 2015, a year after he is supposedly out of office.
Finally today, Japan joined the money printers group, announcing they will expand the BOJ's balance sheet with the purchases of $100B plus of sovereign debt.
The central bank announcements in Japan and the US set up quite nicely for participants in the carry trade. Money in the US and Japan is practically free. The Australian bank rate is 3.5%, although the yield curve there is slightly inverted. (Rates are lower for longer term loans) The one year bill rate in Australia is 2.89%, two year 2.81%, compared to .17 and .25% in the US for the same maturities. In Japan, rates are even cheaper, with the one year yield only .09%, and two year bills .10%.
Australia has been a favored investment destination. Their bonds are rated AAA, the GDP grew at 4.3% last year, and Westpac this past August estimated the growth rate will be a very creditable 3.5% for 2012. With stable growth in Australia, and attractive rates, the A$ has also been gaining favor as a reserve currency. Switzerland, Germany, and China are among those who have been buying the Aussie Dollar.
The strength of the Aussie is a mixed blessing, making imports cheaper and exports more expensive. As the mining boom slows, Australia will be better served with a weaker currency, but with the interest rate spreads between Japan and the US, carry trade players will continue to move funds to Australia.
Currently the equity and currency markets are confronted with a plethora of concerns which will provide volatility. Australia is acutely concerned with the Chinese economy, but the possibility of a global economic contraction is another consideration. How severely would the A$ be hurt in a 'risk off' situation?
There are other international concerns. What is going to happen with the spat between Japan and China over ownership of a few small islands in the China Sea? Will Germany continue to dictate austerity programs that destroy growth in Europe? Why is an armada of vessels congregating at the Strait of Hormuz? Will Iran's nuclear development be attacked prior to the completion of their bombs? Is the pending US election a concern for markets?
On periods of strength in the A$, around the 1.06 handle, we wish to sell the AUDUSD. (FXA) Eventually we think the bears will prevail, but not without a battle. A strong Aussie will hurt their economy. To combat this, the Reserve Bank of Australia should cut the bank rate. The next scheduled meeting of the RBA is October the 2nd. There should be some nice volatility ahead of this report.
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Author Bios
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Ralph Shell: Ralph did his graduate studies in economics and history at Duke University. He has ten years experience trading cash commodities in domestic and export markets and is a former commodity analyst with Merrill Lynch in Chicago. He was a member of and floor trader at the Chicago Board of Trade for 18 years.
Forex Captain: The Forex Captain has been a strategy developer and forex trader since 1998. From 2002 till 2009 he ran a successful managed account based on his tradestation coded strategies at FXCM. In 2007 his managed fund was ranked in BarclayHedge Rankings as one of the Top 10 Currency Traders managing less than $10M & more than $1M. Since 2009 he has been developing Expert Advisors in MQL4 for private trading, and from June 2010 he has joined the Project Triumph team as a currency analyst and project manager.
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