How China Helps the Canadian and Australian Dollar

By Sean Hyman

Just when the U.S. and Europe can’t seem to give away cars... China can’t get enough of them in lately! In many cases, there’s a three week to TWO MONTH waiting list!

Auto manufacturers like Hyundai (HYMLF.PK) and Honda (HMC) are getting a huge boost as they produce some of the most popular cars in China (the Elantra and CR-V, respectively).

Why all the demand all of the sudden? It’s a combination of things: Chinese tax cuts, an economic rebound and subsidies. While auto manufacturers had factored in a 5% increase in sales, in reality they got a 14% increase in sales (almost triple expectations)!

How does this compare with where we were a year ago? Sales in China are up 47% from that point. Wow!

You can see the full article, here.

Obviously, if there is such a ‘hot demand” for cars in “highly populated China”, then this will eventually take a toll on oil and gas supplies once again. Therefore, this will continue to put pressure on these commodities, longer term.

So how does that work into currencies? It will help the countries that are major oil exporters, like Canada. So the Canadian dollar will be a huge beneficiary of actions like these from the Chinese. Thus, one could sell short the USD/CAD pair or buy the CAD/JPY pair at good technical entries on the charts and stand a great chance at a longer term trade (for as long as Chinese demand for cars continues).

Click to enlarge:

USD/CAD enters into a long-term downtrend!

Now here’s another story, just unfolding, that will aid another currency. Let’s delve into it.

Recently, China had thought that it had ensured a stake in Rio Tinto (RTP) (a huge iron ore miner). However, that deal just fell through. Therefore, what will be China’s course of action going forward? They stated it Wednesday.

China plans on accelerating its investments into iron ore projects in Australia, one of the world’s largest exporters of iron ore. This way, the country can still ensure that it can get its hands on the iron ore that it needs for its rapidly expanding economy.

See the full story, here.

China has already been successful in forging deals with Australia’s junior miners, so it should have no problem making these new investments and assuring itself of the iron ore supplies that it so desperately needs.

In fact, it’s estimated that China may invest roughly $500 billion on foreign resource investments over the next eight years.

As you can see, these are no small sums we’re talking about here. In fact, China is the world’s biggest buyer of iron ore.

These huge investments into Australia and the demand for Australia's iron ore will ensure a great profit stream for it and boost its economy. So Australia will get to ride on the coattails of China’s recovery once again.

This will continue to be supportive of the Aussie dollar (AUD/USD, in particular). So looking for a good technical entry on the charts to buy could be in order here as well. Again, this is no short term dynamic either. So this will help the Aussie dollar for some time to come overall.

Click to enlarge:

AUD/USD is in a nice uptrend!

The Bottom Line: Look to be a buyer of the Aussie and Canadian dollars as the demand from China helps to fuel growth & profits in Canada and Australia!

Disclosure: The author has a position in the above-mentioned trades.

Original article

Comments

[Donald Ingram:]

I wonder why the iron ore deal with Australia fell through?
One possibility is that China, looking to lighten it's load of US dollar denominated foreign reserves, was attempting to pay for the deal with US dollars, which was refused by Australia.
The US dollar is fast becoming a 'hot potato' on the worlds financial stage. Look to China and Australia to sign a currency exchange deal in the near future.

Jun 11 11:00 AM

[HaavBline:]

The Aussies are better positioned to ride China's rise than the Canadians.

The Canadians has been giving China the cold shoulders since the Conservative party of Steven Harper came to power. The Chinese seemed to decided not to bother with them unless necessary.

Jun 11 11:47 AM

[ValueInvestor:]

Nice try Cetin.


On Jun 11 02:07 PM todddd wrote:

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> their site at gll.org). This is truly brilliant thinking, as it
> uses the current environment to subtly undermine the status quo.
> The non-profit model would be a brilliant
>
> good finance articles...kl.am/tsc recommended

Jun 11 02:40 PM

[RiskReturnO...:]

Aussie / Yen is best trade, long FXA short FXY could do it, or for simplicity, you can own DBV, which also has NZ Kiwi exposure.

Jun 11 05:10 PM

[CES:]

Buy EWZ and EWC.

Jun 11 05:44 PM

[Oz Investor:]

The iron ore deal fell through becuase the Chinese did the deal at a market bottom, but neglected to seal it before Rio shareholders realised that they had been fleeced. It was a dud, caused by the credit crunch, and supposedly the only option available. Jim Leng (ex-chairman who was only in the job for 3 weeks) knew it was a shocker, so he got out before he was implicated in the deal.

Rio joining up with BHP is a great move for both companies, although maybe not a great one for Australia (and Western Australia in particular). Synergies and savings means a reduction in jobs, which won't help the position of the Australian economy. They will sell the same amount of ore, but make more money. Great for the companies, but maybe not for the country.

The capital raising by Rio will put them in a good position although the merger is yet to be approved and may still be blocked. While the deal is a merger on an asset level, sales are apparently separate. This is how the companies will try to avoid competition issues in the various markets, and why it might work this time while the BHP-Rio merger didn't get through previously.

Amusingly enough, China has one buyer (CISA) negotiating the iron ore offtake for 2009 yet complain that BHP and Rio will limit compeititon. I could say something about pots and kettles here.

China will look at the iron ore juniors, but their volumes are tiny compared to the BHP-Rio. FMG is the closest, but even they are about 1/4 of either of the majors. They will try to combine a few of them though.

Bottom line is that the Chinalco-Rio deal was a stinker and rejected on economic terms. Nothing more, nothing less.

I do agree with you on the strength of the Aussie though. It's on the up and up. Driven by interest in iron ore, gas (LNG), coal, uranium and copper plus political stability resulting in safe projects. The Chinese know how important political stabiltiy is, have a look at the Tiananmen massacre for evidence. Along with proximity to Asia, it's the massive advantage that Australia has over other commodity suppliers.

Jun 12 12:09 AM

[Steve Hughes:]

Brazil will still have a goodly share of the iron ore going to Chindia. For the simple reason that their labor costs are considerably lower (at this time) than ozzie union miners get. The longer shipping trip to the Far East is not much of an overhead difference either.

Jun 12 01:18 AM