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Wentworth Securities - A$ Trade
 
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03 - 09 - 2015
This communication has been prepared by the at Sales and Trading team within Wentworth Securities. It is not a research report and is not intended as such. See full disclaimer below.
Tactical Trading
Profit from further A$ downside
A$ falling to US$0.60? - a further 10-15% in this trade?

The case for the A$ falling further continues to increase, in our view. Taking a longer view, we now target a A$.60 level, which would add a further 15% to the trade we hold through US$ ETF's. In simple terms this trade will continue to leverage the out-performance of the US vs Australia economy. 

Why
  • GDP growth looks like it will come in at about 25% less than Govt forecasts at 2% vs 2.5% forecast, for the year.
  • The composition of GDP growth is low quality, being held up by Govt consumption (see table below). 
  • The Govt GDP growth forecasts are not based on reality (in our view). As recently as Tuesday night, I listened to the Australian Treasurer defending the increasing growth forecast of 3% to 3.5%. Other than a massive increase in Govt spending, I would like to know how this growth will be created, without a major re-balancing via a drop in the currency.
  • Currency is still the only lever left to pull. When you are having a collapse in all your major GDP contributors (iron ore, coal, base metals, oil); few people can afford housing pumped up by investors; Governments have made increasing public debt a political issue, what is left? Currency.
Other reasons to consider this type of trade

The trade we discuss is to be long US$ vs A$. We do this via an Australian ASX listed ETF.  The trade diversifies away from equities; you should profit generally if Aust equity markets fall; and in the event of a major correction or market crash (ie GFC) the trade should continue to be profitable.

Outside of a direct trade, this call would have important implications for international allocations, whether they be hedged or un-hedged, and will effect performance, if we are correct.

A key risk, as we see it, has less to do with Australia economy and more the US. If they fail to move forward with rate increases, then this may place upward pressure on currency. However, even just last night, the FED Beige book supported broad moderate growth across the US economy.

I would encourage you to take at look at the charts from the RBA release which I include below (full chart pack here).
Look at the composition of falling GDP growth
We have been calling this trade for some time, and you can read previous notes HERE. Since April 2014 this call has returned +24% vs the ASX200 -7.07% (see below). And from here, we see it as somewhat of a circular argument, either the currency falls and does the work of rate cuts, or the currency does not fall and rate cuts are needed to bring the currency down to re-balance the economy. 
 
"The Aussie dollar will continue to do more of the work for the RBA and it won't be necessary for them to cut interest rates to continue to support this rebalancing of growth in the economy," said Paul Bloxham, chief economist for Australia at HSBC (article From AFR)
 
or 
 
John Abernethy: The Aussie needs to be in the low 60's to stop a recession (Link to Livewire interview)
Trading Call - 12 month Common Base: USD ETF vs ASX200
12month Common Base: USD ETF vs AUDUSD
The Following Charts are taken from yesterdays RBA release.

Trade/commodities are dire and not necessarily at their lows.
Whilst the Employment data is mixed, and not convincing some economists that the trend is worsening, the A$ holds up.
And the Mining CAPEX numbers are forecast to get much worse!
Housing market doing well. However, investors continue to drive this growth at the margin, which is worrying. Showing up in housing prices and driving wealth effect.
And yes, after inflation the real cash rate is already below 0%! Aust Gov bonds also a good place to be. We see yields falling.
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Wentworth Global Capital Partners
Wentworth Global Capital Partners
The Wentworth Securities Team

Clint Abraham

Head of Trading and Portfolio Management
d: +612 9119 6033
e: clint@wentworthgcp.com

Thomas Schoenmaker
Director
d: +612 9119 6036
e: tom@wentworthgcp.com

 
The Wentworth Corporate Finance Team

Scott Griffin
Head of Corporate Finance
d: +612 9119 6037
e: scott.griffin@wentworthgcp.com

Ian Gebbie
Director - Corporate Finance
d: +612 9119 6034
e: ian@wentworthgcp.com
Disclaimer  - Please read in full

This communication has been issued by Wentworth Global Securities Pty Ltd ("WGS") (ABN: 96 155 409 653)  (AFSL: 422 477). WGS is a wholly owned by Wentworth Global Capital Partners Pty Ltd ACN 155 398 333(“WGCP”).
 
Not research: This communication has been prepared by the at Sales and Trading team within the "Securities Division" of Wentworth Global Capital Partners (WGCP). It is not a research report and is not intended as such. This publication is intended solely for information purposes of WGCP's Wholesale, Sophisticated and Professional Investors as defined by the Corporations Act 2001 (Cth) or the equivalent in each respective Jurisdiction.
 
Because this document has been prepared without consideration of any specific clients investment objectives, financial situation or needs, your financial advisor should be consulted before any investment decision is made.
 
Wentworth Securities does not accept any responsibility to inform you of any matter that subsequently comes to its notice, which may affect any of the information contained in this document.

This document is a private communication to clients and is not intended for public circulation or for the use of any third party, without the prior approval of Wentworth Securities.
 
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