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Wednesday, October 08, 2008

Outlook for the AUD-USD - support is in sight?


The AUD has been absolutely hit in the last few months, falling from a high of $US0.985, just short of parity to $US0.6995 in recent days. The currency has since recovered to 0.714. The question is - Is this the bottom? The market talk is that the Australian government, having lead the central bank cuts with 1%, might be looking at another 1% in future. In fact the ECB and Fed are taking the same direction. As long as asset prices are falling there is no possibility of stimulus. The flipside of that is that interest rates are ineffective as a basis for stimulating the economy. if asset prices are falling because people buy generally when they think prices are going to rise. Asset prices will keep falling for as long as people think they are overpriced. The market talk is that property prices need to fall another 25% in Western markets.
The argument is - Is the carry trade over? No, not for years yet I suspect. Until the Japanese government decides to adopt some fiscal courage there is no possibility of the Japanese central bank raising rates. The unwinding of the carry trade has brought the AUD down, but watch as people jump back on board that boat. This is why the currency is so volatile. Traders are going to trade it back up again.
The next question is - What is the bottom for the AUD? The AUD did hit a support at 0.704 and recover, though I would not be surprised to see it test $0.678 in the next two days. Certainly your trades should reflect that possibility. This is a sweet opportunity to buy AUD. The Australian economy is among the most healthy.
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Andrew Sheldon www.sheldonthinks.com

Monday, September 08, 2008

Stronger USD outlook likely to rebuild savings

The outlook for the US economy is certainly weaker as the Fed steps into a revive the government owned agencies - Freddie & Fannie Mae. These agencies were destined to fail, and highlight the extent to which these government-owned agencies have been used to bankroll US property market investment. Foreclosures will need to be absorbed by the market before we can expect any rebuilding of confidence in US markets. So we might ask - what is the direction for interest rates? The way I see it, something has to give, whether its:
1. Higher inflation - its not going to be asset inflation, so it will have to be cost-of-living inflation
2. Weaker USD - this is if the Fed Reserve continues to subsidise credit in the USA
3. Higher interest rates - in order to rebuild savings in the USA - which will boost the savings rate, but will likely also strengthen the USD. There will need to be tax increases as well to finance government.

The Democratic (Clinton) tradition has been to rebuild savings after the Republicans (Reagan, Bush) have decimated the treasury. I would therefore expect increases in interest rates, higher tax and increased government spending. This will be a 'rebuild America' program, with a lot of flag waving and a strong USD. The implication is that the US is going to go into hiberation for a few years, so if you are looking for a growth scenario, you will be looking to Asia, and obviously Australia will benefit from that. Though without a strong US, we would be looking at a weaker growth scenario for Asia, and I would not be surprised to see domestic stimulus to rebuild the global balance. Expect property booms in Asia. There will be great opportunities given the current global weakness. The stronger phase will be in 5 years when the US does contribute.
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Andrew Sheldon www.sheldonthinks.com

AUD-JPY faces a consolidation period

The AUD-JPY exchange rate is an important indicator of the carry trade. At this point, we are witnessing a consolidation in the AUD after it hit support around Y86. This consolidation is occurring because of the mix of good and bad news facing the Aust economy. The focus is on Australia because we see notthing happening in Japan. No reform, no significant stimulus. Just a reshuffling of party leaders. One day they are bound to get it right. The factors likely to underpin some strength in the AUD include:
1. Weaker interest rates is likely to see a rebuilding of interest in property investment
2. Certain metal commodities have remained fairly strong - coal, iron ore, alumina, gold
3. Australia's commodity focus & position in Asia mean it will fair better than other commodity producers - except perhaps South Africa (gold, platinum focus)
4. Increasing takeovers and investments by Chinese companies in Australian resource projects augers well for the country's future. Remember the impact Japan's investment had on investment. China's participation will likely be more significant.
5. Stronger food prices and rains I suggest will likely see a stronger rural sector, also helped by mining.

Those factors undermining the AUD are:
1. Lower interest rates is likely to place pressure on the yen carry trade, as funds are shifted out of Australia. NZ?
2. Business investment is going to result in greater outflows, mainly for mining. These projects will see the AUD rise high in future, but investors are short term focused so they will focus on the current account deficit, although it does strengthen economic activity, it does not flow through greatly to the retail sector.
3. The weaker global economic outlook is placing pressure on commodity prices, and thus those countries with commodities exposure.

Short term I am expecting a stronger Australia equity market, initially from the broader market, but thereafter the commodity-based markets should kick back in, and will rejoice in the greater interest by Chinese investors (mostly government enterprises) in our mineral & energy resources. I actually don't see a lot of weakness in interest rates because inflation is still high and spending will likely recognise the bottom. Until the global economy can see a problem, I think we are looking at the AUD going sideways against the JPY. The greater action will be the AUD-USD until we see more positive recovery in commodity prices.
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Andrew Sheldon www.sheldonthinks.com

Tuesday, July 08, 2008

The USD poised off resistance

The USD has been strong, though it remains to be seen if it will break 108.2. I think not given the weakness in the market. I think the Fed will lean towards a rate cut rather than concerns about inflation. Its first priority will be growth, and whilst it might talk about raising rates to deal with inflation, the reality is that most of the money supply imbalance will be corrected by insolvencies and reduced speculation (debt liquidation) rather than interest rate increases. Why? Because the Fed will be taking its time to raise rates. It will talk about it but the reality is - the economy always gets primacy. The case for this is stronger close to an election -even if Bernacke suggests otherwise. The notion that the Fed is independent is a crock. We just need a fall below Y105 to correct market perceptions.
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Andrew Sheldon www.sheldonthinks.com

Thursday, June 19, 2008

The USD-JPY - a cautionary note

The USD has experienced some strength lately, though I suspect that is about to come to an end around Y109. The USD did however convincingly break its downtrend, so that is reason for caution, however I would give it until the end of the month to prove otherwise. I believe the coming 2 weeks will be a bad one for the USD. I dont see stronger interest rates to support the USD. Might the US economy show some unexpected strength? Well we'll need to watch the indicators. Importantly the Dow Jones index is at a support level, and I suggest that is a basis for support.
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Andrew Sheldon www.sheldonthinks.com

Thursday, June 05, 2008

AUD-NZD breaks previous highs

The AUD is fairly strong at the moment due to the strong export revenues from coal, iron ore and gold, and metals in general. The agricultural commodities are also providing mixed support. This is one of the reasons why the AUD is strengthening against the NZD of late. The other reasons are the interest rate differential is opening up. NZ interest rates are showing signs of peaking and growing inflation pressures in Australia are prompting a desire by the RBA to increase rates. It therefore seems likely that the AUZ will sustain its premium over the NZD having breached the $1.25 historic cross rate, last reached in early 2006. Thats not to say I see the NZ central bank lowering rates significantly or at all. I think they have just as much need to worry as Australia. NZ'ers have never been good savers. Australia has a better track record on this statistic. So I do expect the AUD-NZD to continue its rise to about $1.33, but then I suggest there will be profit taking. This will have big implications for NZ in terms of investment - see here.
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Andrew Sheldon www.sheldonthinks.com

Sunday, June 01, 2008

The USD-JPY on a knife edge

One of my readers from Japan Forum was highlighting the fact that the USD has been strong lately - contrary to my few that it could be heading to Y85. I retain the view, and gave him the following response:
I think its premature to say whether I still believe the USD-JPY is going to Y85. My reasons for weak USD are that I think US Fed will lower fed rate to 1% as before, concerns about an election, weak economic news and also the possibility of a bank failure. Likely JP Morgan or Goldman Sachs based on their derivatives exposure, but who knows. Also if you look at a chart, the USD is at the peak of its long term downtrend, so you might want to hold that thought. I of course expect it to fall. In support of your view, you might want to look for strength in USD over the coming week. We are really on a knife edge.
Basically I dont see USD going to Y85 as any sign of USD worth, just as a speculative possibility. Which is why I recommend AUD, rather than JPY-USD on my blogs. AUD doing very nicely. So maybe its an issue of perspective. If you want to hold USD long term, I do think the USD will rise strongly next year. As I said months ago, the US will eventually have to raise interest rates to become a 'savings' country, so the associated higher interest rates will result in a stronger currency. Just in the short term, I see weakness. So maybe its an issue of time perspective. As a trader my money goes elsewhere.
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Andrew Sheldon www.sheldonthinks.com

Tuesday, May 27, 2008

Reiterating AUD support

The merits of the NZD are however overshadowed by the outlook for the AUD. The AUD:USD offers better exposure to commodities for several reasons. I think the Australian food commodity export prices are rising faster than NZ food exports, Australian natural gas exports cover its oil imports, making it effectively a slight net oil equivalent exporter. Subdued property market is slowing consumption like in NZ, but Australia has solid buisness investment in mining industry - thats future productive capacity. Iron ore, coal, gold, copper prices remain high, and most of these revenues are locked in for the next year. For this reason I think the AUD is the currency to hold at least until September, then I would be switching to USD I suspect.
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Andrew Sheldon www.sheldonthinks.com

NZD makes sense as a carry trade

The NZD has been having a rally of late. If you focus on the negative press you might have thought otherwise about holding NZD. The reality is that a weak domestic economy is good for the NZD since it undermines credit growth and domestic consumption, which in turn reduces imports, whilst exports remain resilient. NZ has the benefit of being a food exporter, so it should benefit more in future as we see more general increases in the prices of food. NZ produces little oil so there is some basis for weakness there. NZ is not a great story, but if you are looking for a interest swap (yield) proposition it makes a lot of sense, whether as a carry trade.
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Andrew Sheldon www.sheldonthinks.com

Wednesday, May 07, 2008

Westpac second to call $A-greenback parity

According to the SMH Online "Westpac has become the first major Australian bank to predict that the Australian dollar will achieve parity with its US counterpart". Having forecast that the USD parity twice in the last 2 months, I'm glad the banks finally recognise the reality. I was hounded on Japan Forum for my bold forecast. The error of many was to overstate the importance of the current account deficit and foreign debt (55% of GDP). These factors are not as important in the current context as they were back in the 1980s. The reasons are:
1. The current account deficit (7% of GDP) will fall as interest rates rise
2. A significant amount of the CAD is due to capital inflows which are actually financing much-needed mining & energy production capacity. That capacity of course is going to increase our export earnings.
3. The outlook for metal prices looking forward 10 years is very good
4. We have yet to see the farm sector make any real contribution to our exports, and food prices are starting their own price rally. This is truly the era for commodities.

The implications is that rising interest rates will curtail spending, and thus imports, whilst exports will continue to increase. As far as the foreign debt is concerned, its a sign of Australia's attraction as an investment destination. In fact, we have good quality housing stock as collateral, aside from the mines. Who wouldn't want to invest in Australia's high yielding currency. Actually the AUD can be considered a 'hard currency'.

Westpac forecast today that the Australian dollar will reach $US1.01US by the start of next year as interest rates in Australia stay high and the benefits of the resource boom remain strong in the economy. I personally think the AUD will perform even better. I can see it topping out at $1.05 by year end because of rising rates in Australia, but falling rates in the US. That situation will reverse come year-end, though I still see the AUD staying in a high range, with $A0.95 a likely support in coming years. The Australian dollar was 94.84 in the New York after the Reserve Bank left official interest rates at 7.25%.

The AUD will benefit from further cuts in interest rates by the US Federal Reserve, and this is occurring at a time when the AUD is under pressure to raise rates. Its possible the RBA will hold off too, as I suspect it will not want to push the AUD higher, particularly if it too perceives the Fed as subsidising the US banking system prior to an election. There is potential for a widening in the so-called yield gap between US and Australian rates. Apart from the yield gap, there is the attraction of portfolio investment in the Australian mining industry. We have yet to see any significant investment in gold companies, and I believe we might yet see a lot of Chinese investment in Australian mining, just as the Japanese did decades ago.

The reality is that the banks never understood the metal sector. They thought this was just another unsustainable commodities rally. "Before today's update, Morgan Stanley had the strongest Australian dollar outlook among major financial firms with its prediction the currency would be at 96 US cents by the first quarter 2009". Pathetic. Can one expect their fund managers to be any better? Overpaid dicks.
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Andrew Sheldon www.sheldonthinks.com

Tuesday, May 06, 2008

AUD-USD going to parity with USD

I have long argued that the AUD is moving towards parity with the USD. I can see the AUD rising as high as 1.05USD, however I remain to be convinced of that. Technically the AUD looks like gathering momentum, and I see the Fed keeping interest rates low in the lead up to the US presidential elections. Post-election I actually see US interest rates being raised aggressively, which will send the AUD into a tail-spin. So it will be a short term ascension for the AUD. I expect the Fed to start raising rates just prior to the election, if only to create the perception of independence. Who are they kidding?
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Andrew Sheldon www.sheldonthinks.com

EUR-USD returning to USD1.60

The EUR-USD is set to rally again to USD1.60 based on technicals. The EUR is currently lying at USD1.55 support. -------------------------------------
Andrew Sheldon www.sheldonthinks.com

AUD-JPY will break Y100 again

The AUD has had a good run against the Yen as expected. Although I can see short term delays breaking Y100, I actually believe the AUD is going to return to its previous high of Y108. At this point it will be sold off. The outlook for the AUD is going to remain positive. Strong capital inflows is supporting the market, whilst high oil prices and higher interest rates are helping to curb spending. It doesn't get any better. Higher interest rates is required to curb imports, which paradoxically result in a stronger AUD. At some point (Y108) the traders take their Yen and run though, and the likely reason will be weaker outlook for industrial commodities. Iron ore & coal though look good, so do the agricultural commodities. Inflation remains a problem.
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Andrew Sheldon www.sheldonthinks.com

Tuesday, April 29, 2008

USD is close to Yen resistance at Y105

The USD-JPY has reached an important resistance level and appears destined for a sell-down. The USD has rallied to Y105, but it has yet to break out of its downtrend. The prospect of a higher US interest rates would be a possible reason for this to occur, however I dont see higher Fed rates just yet.
Still looking for the USD to fall to Y85.
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Andrew Sheldon www.sheldonthinks.com

Friday, April 18, 2008

USD-JPY still Y85-bound

The chart attached shows the USD staging something of a recovery against the JPY. I see this as a short term recovery. So short term in fact that I think as we go into today's trading I am expecting the USD will be sold off. Why? Because the USD has retraced to the previous resistance level it breached. The next major support is Y85. It will go to that level because the market knows that in an election year the US government & Federal Reserve will be pulling out all stops to win the next election. It wont happen. Americans are waking up to themselves, and their cholesterol-free, low-sugar diets, and will have a reality check. So we are looking at a further 15% fall in the USD-JPY, which on top of a 8% rise in the EUR-USD, suggests we should be looking at a 7% strengthening in the EUR-JPY over the corresponding period, just as an arbitrary.
So watch tonight as the USD is sold off, and that will set the scene for next week. Strong gold week.
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Andrew Sheldon www.sheldonthinks.com

EUR-USD heading for USD1.70

Looking at the chart its apparent that the EUR-USD is going to USD1.70, at which point it will do a double bottom. I would then expect it to return back to its normal trading trade. The technical reasons for this are the strong symmetry evident in the chart. The USD has a 'parityband' between USD1.20-1.35 and has traded within 35c of that band. I am sure the market will be looking to retain that symmetry. So the EUR-USD will be a good 'short' trade from 1.70, though based on prior history, we can expect a 'double top', just as it previously made a 'double bottom' in 2001-2.
In terms of fundamentals, I would expect the Eurozone to welcome the strong EUR as a way of stimulating or supporting US exports in the short term. They might even appreciate the 'lost competitiveness' as a means of driving economic reforms in the EU. The time period is quite long, but we can expect the US election to have reached a result by the time we see the 'double top', then we can expect a recovery in the USD, initially motivated by expectations of rising interest rates in the US, but later also the prospect of greater taxes on the rich. I also believe the US under Obama will adopt a tax on energy, and likely that will subsidise health and alternative energy programs.
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Andrew Sheldon www.sheldonthinks.com

AUD-USD set to break resistance at 95c

Looking at the AUD-USD its readily apparent that the AUD is not about to fall back as many pundits are suggesting. In fact I would suggest its building momentum for an assault on 'parity' with the USD. Clearly breaking resistance at 95c is the next hurdle.
I have already suggested my reasons why. The only reason for thinking this would change is one factor only - the strong inflation numbers. But I dare say that will fall back as money supply growth is curtailed.
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Andrew Sheldon www.sheldonthinks.com

Monday, April 07, 2008

The AUD and its widening trade deficit

I maintain that the AUD will remain strong and that the widening trade deficit is symptomatic of a strong economy. A widening deficit is a basis for higher interest rates, whilst job losses in the USA are justification (a rationalisation) for lower rates in the USA. Regardless mortgage rates will not stay low in the USA beyond 2008. The subsidisation of the bank's short term loan requirements is an electino strategy more than an attempt to secure the banking sector.
The AUD will do better than CAD, which produces a significant amount of oil, but it lacks the significant contribution that coal and iron ore make to the Australian economy. It is also exposed to the malaise in the USA economy. The notion that the RBA would cut interest rates to maintain growth is nonsense because it ignores rising inflationary pressures in Australia.
Source:http://business.smh.com.au/dollar-off-highs-after-trade-deficit-widens/20080407-2462.html?sssdmh=dm16.309681
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Andrew Sheldon www.sheldonthinks.com

The outlook for the AUD

Contrary to the belief that the AUD will weaken because of softer global economic activity, I believe the AUD remain strong against the USD, and to a lesser extent against the JPY. By that I mean I expect the AUD to reach parity with the USD and for the AUD to eventually break Y90. I don’t rate the high personal debt levels in Australia or NZ as a significant obstacle, though they are certain to cause some domestic hardship for some borrowers and lenders.

The high debt level is actually a benefit. The market wants yield, and is not looking for any significant global growth, notwithstanding the opportunities to short term trade . High interest rates in environment of high debt means reduced consumption, particularly of imports. High mineral prices because of capacity constraints mean high export revenues. Paradoxically Aust is benefiting from strong prices because of its 'poor planning'. This is requiring huge capital investment in Australia, so personal consumption is weak, but investment in productive capacity is buoyant and will remain so. We might event expect the government to kick in with some public works (particularly transport infrastructure) once signs of softening emerge. Also expect strong Chinese direct investment in Australian mineral projects funded by China surpluses and motivated by the desire secure mineral supplies. Aust is a net exporter of hydrocarbons (because of LNG), so high oil prices only reduce domestic consumption, which is another plus. The Australian RBA needs to worry about inflation so I don’t see any softness on interest rate policy. Only downside is a few foreclosures but I don’t see a great problem since job losses will be minimal. I cant imagine a better looking economy.

When the food sector recovers from drought after rains last in 2007, we can look forward to stronger export earnings from the farm sector. That will be another strength, destined to drive the AUD to USD parity....but not yet. Consolidation first in the 80-90 range to USD.



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Andrew Sheldon www.sheldonthinks.com

Sunday, March 30, 2008

The end of the carry trade

I see no sign that the carry trade will end soon, in fact I think its as strong as ever. The critical issues are:
1. Japan's growth prospects depend on local deregulation and/or immigration
2. Japan's interest rates are linked to its mercantilist trade policies - that will not die until the USA makes it an issue. It might well be a concerted effort by EU/USA that makes the difference given the recent strength of the Euro.

Based on the fact that there is no sign of change on these fronts, we can expect:
1. Japan to continue its mercantilist policy - Japanese interest rates to remain low
2. Japan to retain its subdued levels of economic growth

As long as Japan has interest rates at 0.5%-2%, we will continue to see carry trades. But the carry trade is not a single trade, rather a series of trades, in & out based on the performance of the respective currencies. It cannot be considered to be purely a AUD play, anymore than it canIf not in Australia then other countries. So buying JPY/AUD may only hurt if Australia does be considered a CAD$ or RSA play. Its all a matter of respective merit. You can be sure however that the AUD and NZD will feature highly because of their merits and high yields.

I see little possibility of the AUD being displaced by other currencies as a better 'carry'. There are not many candidates for the very reason that makes the AUD such a great trade. These are commodity exposure (RSA, Canada dont match), relatively free market, periodically big spenders (terms of trade implications), best China/India exposure (terms of trade implications), and commodity exposure (best worldwide).
I dont see Australia loosing this status because of China/India. I cant see Asia gaining it because they will be big savers for a long time, and they are prone to subsidise interest rates. I would suggest more likely you will see Japan end the carry trade. At some point Japan & China will be forced to drop the mercantilist trade policy they learned from Britain. I dare say it will take the USA to repudiate, or threaten to repudiate its debt before it does that. Really the USA doesn't even have to do that. The USA is holding tangible assets, Japan & China are holding paper that is becoming more worthless by the day. I think the USA wants a monetary crisis because its holding real assets. After that, you can expect a huge rally in the Yen, and alot of reform in Japan to deal with its lack of competitiveness. Its the kind of crisis Japan needs.

Actually probably the greatest rival to the AUD for the carry trade is likely to be the USA. The Fed is currently subsidising short term rates to delay the inevitable rise in interest rates in an election year. You can expect that the USA will lag on rate increases whereas Australia is having an early start because of the strength of its economy. The housing boom has ended in Australia, but alot of new investment is going into mineral export capacity, eg. nickel, coal, iron ore, natural gas, mostly being spent in WA. This investment in the short run will boost domestic demand, so the economic outlook remains strong, with investment offsetting a weak consumer sector being hurt by rising interest rates on home loans. I wonder the extent of variable home loan exposure in Australia. If there was high awareness of inflation then maybe Australian consumption might hold ok. At some point there will be a shift to the USD/JPY, but it will flow back to AUD/JPY when that mineral export capacity kicks back in. Remember the bulk commodities market remains tight. There is inflation, but this is no bust. There is no huge over-capacity, so any slowdown will be painful but it wont create a huge overghang of capacity for some time yet.
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Andrew Sheldon www.sheldonthinks.com

Monday, March 24, 2008

Outlook for the AUD - a brave man's forecast

Reading some commentary on the Australian dollar I seem to be at odds with most of them. The SMH asserts “The Australian dollar may fall 7% in the next two months as commodity prices weaken and global equities decline”. The AUD reached a one-month low of USD90.97 last Thursday, down from its high of USD94.98 on 29 Feb 2008 – last reached on 29 March 1984. The argument for a weaker AUD is “The commodity story from here will be mixed to negative and risk appetite is being unwound”. On that note I am in wonder – where is the risk:
  1. Commodity prices are resilient because of the weak USD. Where is the compelling evidence for a stronger USD? I can see some weakness for commodity prices but not a great deal.
  2. Commodity prices are mostly (coal, iron ore, bauxite) sold forward on 1 year annual negotiations and prices are higher than last year along with volumes
  3. Agricultural commodities are set to be a contributor since the drought-breaking rains last year, so might we expect added zest to the AUD on those export flows
  4. Australian consumer confidence has slumped so we can expect weaker imports
  5. The spread with Japan is even better at 6.75% since the BOJ is offering 0.5%. You might think this is a problem because Australia is a commodity currency, but consider markets are driven by yields and capital growth. I don’t see much prospect for capital growth in the current market, so I am confident the AUD will get supported on the basis of yields. Why else would you buy bonds?
  6. Australia’s public debt as a % of GDP is the best in the developed world at just 15% of GDP. The only positive legacy of the Liberal Party. That gives the current government a lot of capacity to soften any downturn with public spending. One might make the argument that Australia has huge private debt, but its mostly real estate stock and it could be readily absorbed by higher migrant inflows. I would not be surprised to see the Australian Labor government lift immigration intakes, though it will need to pay off the Greens with more national parks and windmills.
  7. Australia is one of the governments that has raises interest rates, so preserving the attraction of the AUD for the Yen carry trade. The cash rate for the AUD is 7.25% after the RBA raised rates this month – thats a 5% spread over the Fed’s 2.25% on March 18.

I have just one qualification – money supply growth in Australia based on statistics I downloaded on the weekend is very high. In fact its at historic highs. The positive implication is likely to be that the Australian government will reign in that money supply by raising rates, at a time when the Fed could possibly lower them more. The USA is going into recession, and more importantly it faces an election.

“Risk aversion remains the dominant factor holding back the Aussie against the US dollar” according to Commonwealth Bank chief currency strategist Richard Grace. I don’t disagree with this, but that is the basis of buying opportunities. The reality is that no where is there growth prospects, so true no one is looking for growth from Australia, however I think the agricultural sector will surprise the market. I also think yield rules in these conditions. Australia is also a significant natural gas exporter and commodity prices in US terms still look good if you agree that the USD is going to its all-time low of 85Yen. I would suggest that Australian commodity export capacity is alot more tangible than the USD banking system. The gold sector is going to be another great performer for Australia in coming years. The other factor supporting the AUD is likely to be efforts by Asian governments to boost their domestic economies in the wake of a weakening US economy. Its worth considering the capacity of Asian governments to do this:

  1. Australia – public debt 15% of GDP – but high external debt
  2. China – public debt 21% of GDP
  3. Korea – Its public debt is 23.8% of GDP
  4. USA – Its public debt is 36% of GDP - but high external debt
  5. UK – Its public debt is 43% of GDP
  6. Canada – Its public debt is 55% of GDP
  7. India - Its public debt is 58% of GDP
  8. Germany - Its public debt is 65% of GDP
  9. France - Its public debt is 66% of GDP
  10. Taiwan – 121% of GDP
  11. Japan – the Japanese public debt is 182% of GDP

If anyone has the capacity to lift spending its probably the USA, but I don’t expect it at a time of rising global inflation. I think the Democrats will raise taxation.

Lastly I want to reiterate - I dont see depreciation - but there will be alot of pain for holders of debt that is not fixed. You should have fixed your property loan rates, at least for the next 5 years.

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Andrew Sheldon www.sheldonthinks.com

Saturday, March 22, 2008

The USD-JPY soon to test Y100

The USD-JPY has recently found some support at 96.5Yen, though I still believe the USD is going weaker. I was actually surprised by how easily the 100 yen level was broken. Maybe it was just a reaction to the Bear Stearns failure, but I think the market is going to need more convincing that other financial institutions are not going to fail.
There might also be some market trepidation with the US presidency up for grabs. Looking at the chart above its apparent that the US dollar has been stronger over the last 5 days. I think its fortunes will be far worse next week. It was always going to retest that previous Y100 level it broke so easily. So having reached Y100, I think it will be fall back, eventually reaching the Y85 level. If I am wrong, we will know early next week.
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Andrew Sheldon www.sheldonthinks.com

Wednesday, March 19, 2008

Trade the AUD from Y90 to Y100

The following is a discussion I had on Japan Forum. Got a debate going on the outlook for the AUD against the Yen.
[QUOTE=tanmedia]If NZ and Australia have a debt crisis, there will be pressure to cut interest rates. The Reserve Banks of both countries are between a rock and a hard place at the moment.
Rising energy costs yet some of the highest debt in the developed world.[/QUOTE]
No question there will be a debt crisis but you need to consider 2 things: (I) Australia, and particularly NZ have run much more disciplined monetary policies than the US, so rates never sank to the level of USA, and Australia was far more prosperous. There were 'no doc' loans in Aust, but not to the same level of abuse. (II) The drought appears to have ended, so thats another $6bil of export revenues for next year at a time of rising prices.

[QUOTE=tanmedia] "The Aussie is hostage to competing forces rigth now. On one hand, the endless rise of world commodities prices and the great fall of the US Dollar are good reasons to back the Australian currency. Indeed, Australian exporters can take full advantage of rising gold, metals and energy prices." [/QUOTE]

Well most of those commodity price rises are due to falling USD of late so mixed impact. Precious metals are rising in real terms, base metals are falling. Bulk commodities like coal and iron ore are doing very well. But AUD is rising also because of agric export outlook and higher interest rates whilst US cutting its rates. So I agree with you there.

[QUOTE=tanmedia] "On the other hand however, there is a new event on the FX markets which is bearish for the Aussie: the liquidation of carry trades. Those long-term positions were based on the different interest rates on government bonds in different countries (a basic carry trade being to buy the high yield currency and sell the low yield one). [/QUOTE]

Eh, I thought we just agreed the outlook for AUD was good. I see it breaking $1 parity no question. But maybe you are talking in terms of USD.

[QUOTE=tanmedia]"The dominant carry trade of the last few years was a strong bearish force for the Japanese Yen. It was cheap for global spculators to borrow the yen because of ultra-low interest rates in Japan for years. Since last November roughly, investors become more and more risk averse, fearing a global slowdown and the unknowns of the credit crisis. [/QUOTE]

I think the crux of this argument is whether relative yields are important or absolute yields, and I would suggest relative yields, plus monetary policy. Aust is showing a tighter policy than Japan, so all things being equal, I think we are looking at Y90 being support for the $A. I think the carry trade is not one trade, but some with a long, others with a short term perspective. What forex traders also fail to see is the bent up demand for commodities, ie. The 100 ships waiting off newcastle port, the planned mines which cant get mining equipment. That is keeping metal prices along with strikes.

[QUOTE=tanmedia]"So what have they done? Yen carry traders are getting out of long-term winning positions to lock in profits. They're also making a big change in their asset allocation, which should favour commodities. That's why the Yen is currently in a massive up trend. It's rallied against all the high yield currencies, including the Aussie."[/QUOTE]

Looking at the AUD-JPY, I can see a great looking trade from Y90 to Y100. I think it would be imprudent to expect more. I think you'll find your market comments are old news and pundits are about to jump back into AUD, whilst some will just continue to hold it. The higher agricultural export volumes & prices will take time to come. Terms of trade should improve as well. Can you say the same about Japan with oil prices at $105-115/bbl. Australia producers about 30% of its oil, but add in NW Shelf gasm and it has a net fuel balance.
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Andrew Sheldon www.sheldonthinks.com

Sunday, March 16, 2008

George Bush believes in a strong USD

President George Bush said in the wake of the Bear Stearns bail-out, that “the US believes in a 'strong dollar”. Does that give you confidence? Surely that news is likely to push the USD to its all-time low of Y81.12 set on 19th April 1995. But we are a long way from that. I suspect the motive for the comment was to calm those governments holding large amounts of US treasuries, namely Japan, China and Saudi Arabia. Afterall why would a foreign government want to hold a basket of bonds in a depreciating currency on which real yields are also falling. So that’s the rhetoric to support buyers. Which raises the issue of whether the US government will have a problem financing its deficit. The US has had a succession of tax cuts under Bush, with the economy oftening it looks like there will be a series of tax increases in future. On the other side, who wants a weak currency at a time of weaker economic growth? Where is the value when most of your competitors are pegged to your currency? Only the Euro and commodity currencies like Australia, Canada and NZ offer competitive advantage, and they are not significant markets.

Currently the USD is trading at 98.05, well below its 2005 low 0f 101Yen. The doubts cast over the US economy, the high oil prices, the prospect of weaker global growth all seem to support a weaker USD, and more importantly the Fed is about to cut the Fed rate by another 1% to at least create the myth that there will not be a recession. The high oil price in USD terms is sure to undermine local spending too. It could not look much worse. The positive of course is that the USD can repay all its debts by merely flooding the world with USD. It is left holding a lot of very tangible assets, whilst Japan & China can monopoly money. But we are years away from that. Its all payback of course for the mercantilist policies in those countries. So sit back and watch the USD fall to 81.12 Yen. I actually though it would come later, but the Bear Stearns bail out will undermine confidence in financial institutions. I give the Fed credit – they are great at managing perceptions. If only they could manage money better.

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Andrew Sheldon www.sheldonthinks.com

Wednesday, February 27, 2008

Hail to the Yen!

Anyone who knows me knows I like an argument. Call me a tease, provocative, a dick, etc, but nothing gives me more pleasure than challenging myself. Gets me thinking, and it gives me more motivation to write. So today I had a good discussion with Ken at www.gaijinpot.com/bb/showthread.php?t=49871. We are discussing the merits of buying foreclosed property in Japan.

Ken said: I expect the USD to stay weak during 2008 but rise again in 2009. I don't see the J-government/US government letting the yen go through the roof against the USD like it did in late 1990's. Bottom line: the USD is the generally the stronger currency.

Andrew said: The US 'has' been the stronger currency, but that need not been the case in the future. Its not an arbitrary principle. The reason why the USD was strong was because the economy was growing, and all that debt was performing well for Americans. But asset prices are in reverse. Which means the cost of living has to rise whilst debt is liquidated. Its a double-whammy to restore monetary equilibrium. Why should the USD strengthen? Of course it will as a short term trade. Sure there will be interest rate increases, but they will lag inflation.

Ken said: Because it's not going to crash all that much against the yen. The yen is still over 100 yen to the USD. The J-government does NOT want the USD to fall below 100 long term and will resort to currency manipulation as it has done many times in the past if need be.

Andrew said: I think the problem with those arguments is that they are old. The paradigm has changed. Spending will fall off alot in the USD, so there is no point being competitive in the USA. Asian currencies are rising, and the Euro, this is where the Japanese exporters will be making more money, not to mention the Middle East, Russia and other commodity producing countries. Japan has been shifting increasing capacity offshore anyway, so only high value production retained in Japan. Japan is almost at a point where it is a holding company like Britain, with most low-value product manufacturing is located offshore.

On your last point, it was easy for BoJ to manipulate the currency when the US economy was strong. But not its not, the carry trade is being unwound. Where will Yen go? Sinking USD, sinking US assets? Nope. Some will go into metal commodities, some into agriculture (in USA & elsewhere), some into commodity markets, but most will go home, afterall Japan is the world’s third largest economy. So Japan starts to look quite good! Weak exports, but some sound basis for domestic demand. Its a more compelling story with reform, but looks ok.

Japan will copy Korea - nice irony dont you think

Ken said: The fact is the J-government does not like a strong yen.

Andrew said: Well they didn’t like a strong Yen for the sake of exporters. But like I said, that 'mercantilist policy' has had its day. In the next few years you will see that change. You will see Japan shift to a strong Yen policy, and I suggest there will have to be a policy of economic austerity measures to make Japan more competitive. I think the fact that Korea is taking that path is actually likely to lead Japan to take a similar tact.

Ken said: Old or not the fact is the J-government prefers a strong USD to the J-yen.

Andrew said: Ken, are you 44yo, or born in 1944, because you're being a headstrong traditionalist mate. It might be time to give up the 70s disco scene and embrace the kabuki. Yen will take the lead.

The debate continues…..www.gaijinpot.com/bb/showthread.php?t=49871.
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Andrew Sheldon www.sheldonthinks.com

Sunday, February 17, 2008

Outlook for the USD-JPY

This chart highlights the long term decline in the USD as a result of currency debasement. They all do it, though the US is worse than any other country. Why? Because the USD is the base currency, that is the the currency in which most debt is priced, and most commodities are sold. This is a powerful position because it means that the USA has the power to debase its currency, yet still repay its debt in its own currency. So if the USA is debasing its currency it has a huge credibility problem.
You might ask - Who would care? Well you might think the Japanese, Chinese and Arab governments who are accumulating large amounts of US debt. But no - that is not apparent. We dont see alot of complaining from those quarters. The reason is that they see opportunity where others see problems. The opportunity is:
1. Higher interest rates in the USA
2. Reform of this poorly structured monetary system
3. Continued economic prosperity in the interim, which they profit from, whether its sales of Chinese & Japanese exports, or purchases of Arab oil.
In this last chart we can see that the USd-JPY has stabilised in the 100-130 Yen range. Currently the USD is trading at 107 yen, and I believe it will return to 100 yen, last reached in 2005. Once again the fall in the USD is being orchestrated by a decline in the Fed Reserve interest rate. At that point, there is really two ways for the government (likely a Democrat govt) can address its issues:
1. Increase interest rates and taxation
2. Print USD to repay all those foreign holders of US treasury notes, or some combination of these 2 options.
3. Reform the economy
The US is already one of the most vibrant economies in the world by virtue of the US values system and its dynamic, free-thinking people. But government works in mysterious ways. We have already made the point that the USA benefits from the current monetary system. But I suspect the US might be willing to debase its currency to get Japan and China (and Asia for that matter) to legitimately price their currencies. At some point, these countries will have a large portion of their savings in US treasuries.
I wanted to provide this forecast of the outlook for the USD-JPY for the sake of property investors in Japan. Refer to my report on Japanese Foreclosed Property 2008.
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Andrew Sheldon www.sheldonthinks.com

Thursday, January 17, 2008

Weaker USD-JPY in the short term



As we can see from the chart below we are looking at the USD felling to the JPY101.8 level in the short to medium term. The rationale for that is the more vulnerable US economy, the prospect for an Fed rate cut in the USD, and the unwinding of the carry trade.
At some point in time the USD might fall through this support, but it remains strong for now. Longer term I think it depends on what Japan does to arrest the impact of a softer economy. Historically Japan has been a country capable of radical reforms. eg. The Black Ships, Meiji Era, post-WWII reconstruction. But first it needs to develop some backbone. The current generation of Japanese people just have not suffered enough. The transition continues slowly.

It will take a charismatic leader with good advisors, but unfortunately they are likely to have streaks of nationalism in their air, so lets not hope for too much. But in true Japanese style, its just as likely to be just another pop-facade, ie. Kozumi - Mark II. My favourite Japanese politician is the Major of Nagano. He is a very smart guy, and he rides to work on a Harley Davidson with a side car if I'm not mistaken. Legend! Dancing with Richard Gere makes Kozumi a poor second. Having said that - you an't take Japan too seriously. Not for the time being. The US economy is by far the more flexible economy, so they are the odds-on favourite to hold that support at this time despite their problems in the debt & property markets.
- Andrew Sheldon www.sheldonthinks.com

Range trading & consolidating in JPY-EUR






I actually dont forecast much variability in this cross-rate. I see both markets soft with global demand. The JPY will be strong because of the unwinding of the carry trade, but exports will be weak anyway with the US, though might hold up somewhat in Asia. So I largely see consolidation in this market. So expect range trading between JPY143-168.
The promise of reform looks stronger in Europe at the moment, but then they will struggle with their currency issues and I think a softer Japanese market could actually push reforms there long term. But first they need to find a leader with balls.
Japanese personal debt levels are not so high, so there is some possibility support in the domestic economy. But since the Japanese consumers are easily spooked, I dont see that strength for some time. We also have to remember that Japanese employees are alot more vulnerable than in the 1980s since we have seen an increase in the proportion of part-time workers. The positive side is that these are mostly students and women, so in many cases they can return home or rely on a 2nd income. Though it might mean more tired single workers, thus less spending on everything - except rail transport. So if i was to invest in equities in future, I would be inclined to invest in pure rail operators without property development interests. But we are 6mths away from that bet.
- Andrew Sheldon www.sheldonthinks.com

New target for AUD-USD forex rate $US0.80

The AUD-USD has pulled back from its high of USD0.94 and is now trading at USD0.878. There are many factors working for and against the AUD - and I list the following:
Strong AUD arguments
1. There are alot of investments in commodities already in the pipeline that will feed through to higher commodity sales - albeit at higher prices. Bulk commodity prices (iron ore, coal) are locked in until Apr'08. Higher mineral and agricultural export capacity (from new new mining investments and farm restocking) will take time to feed through to export sales.
2. Australia is experiencing growing inflation. Alot of people think inflation is simply a demand phenomena, so as global growth stalls, so will Australian inflation
3. Australian inflation will require higher interest rates to offset the loss in real buying power of the AUD
4. The possibility of an improvement in agricultural exports as a result of the cessation of the drought
5. A fall in domestic spending will reduce imports, and in the short term strong export receipts should result in a much improved terms of trade, but the flight of dollars into JPY (carry trade) will weaken the current account deficit, and the AUD.

Weak AUD arguments
1. Higher interest rates and the deleveraging of the global economy are likely to unwind the carry trade that sees institutions selling JPY and buying riskier, higher yielding growth economies (currencies) like AUD, NZD, CAN. I think these funds will end up in the home economies.
2. The prospect of a slowdown in global growth is already affecting the perceived long term attraction of AUD. Commodity prices have actually been surprisingly resilient. I see 2 reasons for this: (i) China has yet to respond to the slowdown in the USD. As usual they tend to be the last to pick up on global outlook. They will slow purchasing only when they see softer orders. (ii) Weaker USD is actually helping support the USD price of these commodities. (iii) Post-Xmas, pre-Chinese New Year buying.
3. Higher inflation in Australia will undermine the real value of the AUD
4. Economic uncertainty, high household debt levels, rising interest rates, falling equity and property values will undermine Australian household consumption, which will slow economic growth.
5. Australia is more vulnerable than the USD because it is a smaller currency market - so there will be a flight to avoid volatility.
6. Interest rate differentials will not help the AUD because they are being achieved on the backdrop of economic softness, so the prospect of higher interest rates in Australia, and forecast Fed easing does not move me for now. Its also true that I think the Fed easing will do little to support the US economy, though will likely be justification for a short term rally in the Dow Jones.

As a result of this analysis I see the AUd-USD falling back to the strong $US0.80 support that was established between Jan-04 and Jan-07. Having reached that 'over-sold' level, I think you will see a retracement to $US0.87, and thereafter alot of consolidation for a number of years until debt levels are cleared to some extent, existing global industrial capacity re-absorbed and asset prices rising again. No doubt traders will have some fun in the currency market. But the lesson is - go easy on the leverage - this is a time for economic shocks. eg. Companies disguising weaker earnings, accounting scandals, failed banks and hedge funds. It has already started. This week the $US16 billion writedown by Citibank, then $US11billion by Merril Lynch.
- Andrew Sheldon www.sheldonthinks.com

Monday, January 07, 2008

Commodity based currencies in play

It is in times like these that you want to be trading the commodity based currencies. Why? Because markets are undergoing a change in perceptions - they are adjusting their growth & inflation forecasts. No currencies in these circumstances are better than the A$ - against the USD of course since commodity prices are based in USD. Looking at the charts:
1. AUD-USD: Its apparent from http://finance.yahoo.com/q/bc?s=AUDUSD=X&t=5y&l=on&z=m&q=l&c= that the AUD is at the base of an uptrend. You might legitimately ask - if this the end of the uptrend? I suspect it is not for this reason - base metals are still relatively strong and gold is getting stronger. Indistrial commodities like iron ore and coal are priced on the basis of 1 year annual contracts - those are currently being renegotiated. We might expect some weakness in iron ore & coal, but not alot. But expect delays settling. Looking at a short term price chart, and they are not the best charts, but they are the best I can do on the road - http://finance.yahoo.com/q/bc?s=AUDUSD=X&t=2y&l=on&z=m&q=l&c=. Here we can see that 0.79c looks like the best support for the AUD.
2. CAN-USD: The Canadian dollar is actually fairing alot better than the Australian dollar. The reason for that might be the fact that Canada exports alot of oil to the USA, though Australia also has some advantages. Australia is a bigger gold exporter, and Canada more reliant on base metals. Having said that Australia I think is poorly positioned to retain its status as a large gold producer. The bulk of exploration is moving offshore. The stark reality is that Australian explorers are seeing icey Greenland as more attractive than Australia. It must be a short mining season.... and I would hate to be carrying their heating bill. Pity the investors in that new float. Looking at the 5yr chart - we can see http://finance.yahoo.com/currency/convert?from=CAD&to=USD&amt=1&t=5y that the CAN$ is off its recent highs as oil prices got close to $US100/barrel. Recently they found support at USD parity ($1) http://finance.yahoo.com/currency/convert?from=CAD&to=USD&amt=1&t=1y, and it seems likely that we will see further short term strength in the CAN$, but dont count on it. Whilst oil prices might be strong, I think the broader economic outlook for bae metals will pull down the CAN$. I see weakness down to 95c support.

- Andrew Sheldon www.sheldonthinks.com

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