The Next Big Trade: Shorting The Aussie Dollar

 |  Includes: CROC, FXA, GDAY
by: Will Farley

On June 4, the Aussie Dollar (AUD) closed the trading session buying .9650 US Dollars (USD). Goldman Sachs (NYSE:GS) has predicted that the pair will be beaten down to .8000 long term and have cut their 12-month forecast from .9600 to .9000 AUD/USD. So with QE3 possibly tapering off in the near future, US economic data improving, and a trend of disheartening Australian and Chinese economic data, is being short AUD/USD the next big currency trade?

Australian Economic Headwinds:

Commodities Top

The Australian Economy's strength relies mainly on its exportation of commodities. During the past few months, commodity prices have topped weakening demand for Australia's exports. Combined with a stronger currency, the Australian economy is choking on reduced foreign demand for its goods.

Faltering Economic Data

Australia exports approximately 29.1% of its goods to China. The latest Chinese manufacturing PMI slipped into contractionary territory as it clocked in at 49.2. The slowdown in China is yet another problem for the Aussie economy as demand is slacking off from its largest customer. In addition to China, Aussie data lately has been dismal. The only recent major data beat was building approvals, but construction work done (q/q) also missed estimates.

Rate Cuts

After the June 4 Reserve Bank of Australia (RBA) meeting the Aussie Dollar see-sawed for a bit before plunging 1% against the US Dollar by the finish of the trading session. The day before the AUD had rallied 2% against the USD on weak US data, but this was only a relief rally. After reaching 1.06 AUD/USD earlier this year, the pair has fallen below the .9700 level due to past and expected future action from the RBA. Despite the 75 basis points that have been cut since September, Australia still holds the highest interest rates of all major G-7 currencies. It appears the RBA is now knee deep in a rate cut cycle.


The RBA even recently hinted at a continuation in their rate cut cycle stating in their last press release:

"The Board also judged that the inflation outlook, as currently assessed, may provide some scope for further easing, should that be required to support demand."

As the above data shows demand is diminishing and should continue to do so in the near future. I believe this leaves the door wide open for another 25 bp rate cut at the next meeting. They also stated that:

"The exchange rate has depreciated since the previous Board meeting, although, as the Board has noted for some time, it remains high considering the decline in export prices that has taken place over the past year and a half."

If the RBA believes that the AUD is still relatively strong (as of June 4) there will be further rhetoric and actions taken to weaken the Aussie in hopes of increasing Australia's competitiveness. As markets bake in these expectations, the downward trend in the AUD should accelerate rewarding all those who have shorted. The long Australian Dollar ETFs are FXA, CROC, and GDAY. Shorting the AUD vs. a basket of currencies is the way I would recommend to carry out this trade. I would also not wait to initiate short positions only a few days prior to the next RBA meeting because you will minimize your profits as the market will price in the expected rate cut. Following a miss in the Trade Balance release tonight at 9:30 EST would be my preferred point of entry.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I have no positions in the currency pairs mentioned, but may initiate a short position in the AUD over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.