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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.
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)
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