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Guest Post: The Case Against The AUD
From Damien Cleusix:
"In our last quarterly we said that Australia could be one of the unexpected victim of the next downturn. We received plenty of questions on the subject so we have decided to write an ad hoc research on the subject which you will find attached.
The Australian Dollar is the most overvalued G20 currency and we feel that the economy is mainly dependent on the continuation of the nascent Chinese credit bubble and an increase of domestic leverage and real estate prices. The later being nearly 50% above fair value they will sooner rather than later mean-revert.
The Chinese connection makes its resources sector a good proxy to express potential negative view on China.
Shorting the AUD is tricky because of the negative carry but there will be configuration (bullish sentiment, top of channel, or move above 95...) where one could take short positions but our recommendation is to exit long-term long position at current level and put the money to work elsewhere...
Any questions/remarks/objections are welcomed and appreciated. "
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Two words:
HOUSING BUBBLE
Thats more then enough reason to stay away from that powder keg. The CAD has the same problem although the bubbly housing prices is much more localized (Vancouver, Calgary) rather then being systemic.
I would say three words:
MEGA HOUSING BUBBLE.
Ok, that felt good.
Ha! Thanks for the laugh! :-)
Good info. This is the issue I have been wrestling with for a while.
IMHO, the counter to this is weakness in the USD should have the opposite effect would it not?
If inflation in the US were to increase, the dollar would weaken (absent an unlikely increase in rates from the Fed), which would help AUD. Also, inflation would benefit the commodities in Oz.
If there were deflation in the US, commodities would be hurt, but higher interest rates in Oz would support their dollar, at least somewhat. So it seems there would be at least some hedging effect in either direction.
Of course, I am looking at this from a US-centric POV, and not well factoring in massive Aussie trade with China. And that 3-way analysis is throwing me off.
OTOH, I think there is still at least one good "flight-to-quality" left for the USD which throws in an additional monkey wrench.
Obviously I am waffling. Any thoughts on where I am wrong?
I think you are not far wrong...at least they own lots of 'stuff' that you can see, feel, sell....
..but there again I know I am drinking too much because for a moment earlier I thought I saw the Dow in red figures....pass me the gin!!
According to this the 'stuff' they sell only accounts for 30% of the economy. 40% is financials and property. If there is a significant 'correction' in the real estate market, that's a big chunk of pain.
It's also surprising to see how high a % of home loans are ARM's. Combine that with "In some cities more than 50% of the median income is needed to pay the mortgage on a median priced house" and any further interest rate rises are going to cause a lot of pain.
Canada is worst, natural resources are about 5% of GDP, of course the financials are the biggest part of economy like in all anglo-saxon economies, that's why they drive housing industry like crazy. Australia at least is close to China so they will buy as much as possible from them. Canada will be first to fold.
Canada's biggest problem is our (I'm from Canada) reliance on the US and our very small population density. I'm not sure where you got the 5% GDP number but it doesn't sound right to me.
Either way it doesn't matter because we have massive energy and food reserves and can easily support our own population unlike the US. When the SHTF sure our housing and financial sectors will take a big hit but I don't think it'll be on the same level as what is going to happen in the US. When the time comes we'll develop our domestic markets, f&*k globalization.
Here's a good question for you. What happens when Canada turns off the tap and decides that all of that oil currently going to the US should be refined and used in Canada and the excess sold to someone who can afford it?
US invades?
How about nationalizing all the Canadian snowbird homes in the US. In the end, who would be invading who? Many have family on both sides of the border.
For anyone that knows much about AU, all you needed to see was that Wollongong is more overvalued than London. Wtttttf.
Thing is though, it might make a good case for the depreciation of the AUD, but relative to what? The USD? It's no good betting on a decline in the AUD if the USD ultimately wins the race to being worthless.
You make precisely the right point. Any time someone asks me about which way a currency should trade, I say against what. Without that conext, it's irrelevant to speculate on direction. The only plausible comparison for AUD to go down is against gold and since they are a big gold producer, I'm not even too sure about that. The only reason it goes down against USD is in a flight to quality scenario. And it's not clear to me how big a factor that is anymore for the commodity currencies.
yes, flight to safety will definitely do it, and cessation or slow-down of Chinese stockpiling of iron ore. Either way, the housing market down there MUST end badly at some point, it can't be sustained.
They are all priced in dollars, so there ya go.
Yeah, I agree with the points above. The difference in the USD and the AUD as it stands, is that the monetary policy of the former supports a weaker currency.
The Austrailian central bank needs to deal with the effects of their own housing bubble, but they are also well in the process of taking that punchbowl away. Ben Bernanke's dance with ZIRP and somewhere-below-ZIRP (debt monitizations) should translate into higher inflation expectations. The only reason the USD is holding value these days is that there are dirtier economies sloshing in the PIIGS pen. Oink. Oink.
So many folks have been advocating shorting the AUD for the last 14 months that I've lost count. Each one of them has been handed his ass in doing so. This is the currency you just can't short unless you can withstand a lot of pain. A lot.
nic was praising euraud yesterday but i would look into gbpaud instead
Yes Australia does have a bubble in housing. Making things worse on prices is a heavy under supply. Where I am the local government is unable to release enough land each year to keep up with demand.
I also read somewhere recently that Australians actually have on average some decent equity in their homes. Banks never got into sub prime type lending and did have some standards. Never the less unemployment if it occurs because of a strong pull back in the Chinese economy will push down prices in proportion to the slow down. I am no expert but I don't see a crash of the proportions the US experienced. And of course there is not the endemic subprime lending here. And there is that perenial problem of under supply and with an ever growing population.
The Government is to deliver a budget in May and I suspect from the way they are talking that forecasts will be much more healthier than anticipated and we were already anticipating a healthy result.
As an aside we built a house in 2000 at the bottom of very slow period for housing, paid it off and it has almost trippled in value. I have been tryingto convince my wife to sell the thing to cash in the capital gains and trade down to a simple two bedroom unit and invest the cash, in case we do hit another stronger recession. But she is still reluctant.
You make some solid points Kina, especially on the amount of equity Aussies have in their homes and the higher lending standards. The "no-doc" trend has not yet come home to roost though, that may do so given declining employment at some point.
The one myth that keeps boggling my mind however is the "housing shortage" myth. There is simply no shortage of housing in Australia, never has been, never will be. It is a mindset. I know many, many Aussies (including myself until a few years ago) that own multiple pieces of real estate for investment. These are obviously rented to tenants or occupied by the owner. There are more owners of multiple pieces of real estate in Australia per capita by far than there are in the USA. Negative gearing has created this monster.
Quite simply, if there was a "critical housing shortage" government would simply build projects to house all of these poor, unfortunate people who "missed out" on not just buying, but RENTING also. This is not the case, there are about 50 homeless people in the entire country, and not a lot of government housing except for the indigenous population.
I hope people will see this Government and developer sponsored lie for what it is shortly.
I sold in May, 2005 in the US. Statistically this was the national top; local market drifted up a bit more, but has fallen off substantially. I was successful in doing this, in getting my wife to go through with it, but it cost me my marriage. Oh well!
Interset rates are a way off what they were at the begining of this recession, which Australia didn't really experience. The only ones who will be really affected by raising rates are those who borrowed in the past few years.
The view that we in a bubble, created in part in the past few years is explored here:
http://www.crikey.com.au/2010/02/01/australias-housing-bubble-its-alread...
Next stop: 6000!
We're on the express elevator to hell!
try the case against the can$.
http://www.greaterfool.ca/
In Australia the banks are stengthening their home loan lending criteria, especially Westpac who is concerned of having too much exposure to that market. Yes, a bank that thinks about risk.
Strengthening loan criteria, higher rates and efforts to increase supply should help slowly deflate home prices in the longer term.
And of course in Australia a loan is a loan, you cannot walk away from it, it follows you. No jingle mail here.
Theres a crock right now!
Dang. My co servers block scribed.
its a bubble built on the china bubble which was itself built on the Us Bubble.Us has popped , China is next then it will
be the aussies turn . Anyone can see that
OZ is close to BRIC, well, RIC of the BRIC. OZ is in Asia, which is prospering and expanding regardless of the USA. OZ is part of the Asian economy. OZ has some very real assets, like minerals, agriculture, water problems yes but surrounded by ocean and green desalination will happen, as it is happening now at Calera, in Castroville, CA.
I see too many USA centric folks who think the wrold can't run without the USA. So OZ is in a housing "bubble" in some areas, it is expanding like crazy. The BIG difference with their housing bubble compared to the USA housing bubble, is that the house ATM is not the sum total of the economy and the house ATM is not what is driving spending.
Do we have a housing bubble - Yes. young people buy a home on 30year variable loans simply to "get equity foothold" it takes two incomes to get a loan and that won't last for thirty years. If they did their sums on their loans they would see they are paying twice the amount they would pay to rent the same home and they are stuck with the rates and a building that rots in the sun. They however hope the value increases each year to cover (roughly 5%pa needed). The 50% over valued in the article is about right especially when the baby boomers are looking NOW to downsize and move to a more suitable abode for "empty nesters". But owning your own home remains such a national obsession that it would take a '71' type recession to budge them into reality.
Our trading partners are however extremely diverse. China is our largest followed by Japan but we deal with India, Taiwan, Indonesia, USA indeed all pacific rim nations. If China slows we slow because we are price takers for Coal, iron ore LNG, bauxite, wheat, cotton,Wool et all and it would hurt (and issue in a bad recession).
The fair value of the AUD remains tied to the World consumption society as we have no Apple, Microsoft, GE, Catapillar, LG, Sony, Google's to put a cushion on our balance of trade.
So if commodity prices fall, short the AUD if they rise Buy.
But we really need a good old fashion recession to shake out the hubris because we think we are better off than we really are and the stimulus the GFC gave us is winding down.
It remains a safe currency for any external investor and has risen on the back of US / Euro depreciation. Should that reverse (and it is 'Toppy') so does the AUD.
Australia hasn't felt their pain in the financials and housing yet, but they will. I've always wondered how come that Australia haven't been hit when much of their housing is overinflated.
"In some cities, more than 50% of the median income....."
Worse still, it is more than 50% of the GROSS, yes, GROSS median income.
And, those two cities referred to as "some cities" just happen to house almost 40% (approx 38.6% or 8.5m) of the australian population (22m).
Talk about a bankster job.
Scary.
I think the actions of the AU government with regard to overseas housing investment are also relevant. The rules were changed in a panic when the financial crisis hit, but the thing is there is no real data on how much 'slack' in the housing market has been taken up by foreign buyers. It would be quite ironic if Uncle Ben's actions keep the extended house prices in Australia inflated because of the ability to borrow at ZIRP in the US. If I see US TBTF's leveraging up on Australian property I'll take it as a sign. LOL
http://www.smh.com.au/business/red-hot-market-20100423-tj36.html