Time to Short the Aussie?

October 14, 2013

Last week, the Reserve Bank of Australia (RBA) again made reference towards decreasing their lending rates before the year end. The RBA sees this as a viable method to devalue their currency, as their investment boom appears to be concluding and the country looks to rebuild for the future.

At present, the AUDUSD is sitting on a three month high but it is uncertain how long they can hold on to such a strong value. Their economic forecast for this year has been lowered from 2.75% to 2.5%. Additionally, further doubt has been caused by the International Monetary Fund (IMF) downgrading next year’s growth to 2.8%, rather than the previous estimate of 3.3%.

It appears that an economy, which is in its 22nd consecutive year of expansion, may be slowing down. There are several reasons that explain why this is happening.

An overreliance on China

There is a strong consensus that Australia is far too reliant on their strong business relationship with China. Chinese economic growth is also slowing down, and this has a negative impact on Australia’s exports.

Last year, trade between the two nations equalled 7.6% of Australia’s $1.5 trillion economy. However, China has now recorded five consecutive quarters of growth below 8%, leading to concerns that trade between the two nations will be substantially less, moving forward.

The end of the mining tunnel

The mining industry is now in decline. Previously, Australia had been the envy of the world for avoiding the global recession and solidifying growth, while other countries became endowed in large debt. At its peak, mining contributed towards half of Australia’s economic output.

The slowdown in China, alongside the climax of other mining projects, led to Australia’s major exports such as coal, iron ore and uranium depreciating in value. The value of coal has dropped from $330 a tonne in late 2011, to just under $140 at present.

Similarly, the price of iron ore has dropped by around a third.

Rising Unemployment:

The Australian government is becoming concerned that the unemployment statistics are heading for an increase. Last month, Australia’s unemployment rate climbed to a milestone high of 5.8%. According to the International Monetary Fund (IMF), the Australian unemployment rate will increase to beyond 6.0% in 2014.

It is a foregone conclusion that the slowdown in mining will become a key contributor towards unemployment increasing. After all, over 10,000 coal workers alone have been made redundant in the past year.

A worrying housing crisis

There is an unprecedented fear that lowering the interest rates will encourage a housing bubble. At present, house prices are surging above seven times the average household income. This has led the IMF to diagnose the Australian property market as the fourth most vulnerable in the world.

It is speculated that the proportion of Australians spending more than a third of their income on mortgage repayments has jumped by 20% since 2006. If unemployment rises, there is a growing anxiety that house repossessions are going to increase in the future.

Decreasing the interest rates is likely to lead to higher house prices, as the accessibility to money becomes more available. This could really jeopardise their housing market to greater depths.

In conclusion, these indications are presently leading towards the opinion that the AUD is set for a period of continued decline. It is quite clear that Australia is in need for other industries to contribute to their economy, especially with the mining industry diminishing at a worrying rate.

The problem is that it is hard to foresee any industries within Australia coming to their rescue anytime soon.

In my opinion, we are set to witness an inevitable drop in value for the Australian currency.

Written by Jameel Ahmad, Research Analyst at Blackwell Global.
Follow Jameel on Twitter @JameelAhmadFX.

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