As the great yen short unwinds with a vengeance and central banks the world over continue to pursue aggressive interventionist policies, currency bears are looking for the next casualty of aggressive easing policies. The most likely candidate for a collapse, given several troubling technical and fundamental indications, is the Australian dollar. Australia's economy has become something of a laggard as of late, as demand for its primary exports has dipped, largely due to recent hiccups in Chinese growth and relatively slight corrective actions by the Australian central bank in response to flagging growth domestically as well as to stimulus efforts in other major economies. The latter concern is the primary driver of short interest to this point, as, if Australia's economy maintains a negative trajectory despite some recent positive news, the Reserve Bank of Australia may be forced to adopt policies more closely aligned with those being adopted by other slumping economies and their monetary administrators, the inevitable result of which would be powerful downward pressure on the Australian dollar's value.
Australia's economy has for an extended period of time been driven upwards by government investment and by the mining sector. Recent complications have called into question the continued augmentative capacity of these two sources. The last quarterly release of GDP figures, those of the first quarter of this year, showed a national GDP growth percentage of .6%, just short of the .7% growth expected during this period. The larger number tells only a small part of the whole story, however, as many resource-rich states have shown progressively larger contractions over the last several periods and others have experienced violent short-term reversals. State final demand, defined in a 2009 Australian Board of Labor Statistics note as "… the estimate obtained by summing government final consumption expenditure, household final consumption expenditure, private gross fixed capital formation and the gross fixed capital formation of public corporations and general government", contracted to a notable degree in the Northern Territory, Western Australia, Tasmania, and South Australia.
The aforementioned states provide the bulk of the country's mining productivity. A growth slowdown in China, the largest importer of Australian goods (29.5% of all goods exports from Australia were destined for China in 2012), has cut demand for raw materials produced in these states. June has so far seen Chinese manufacturing activity at its lowest in 9 months, as was revealed last night in the HSBC China Purchasing Managers Index release. As China's new leadership continues to press reform rather than stimulus-based growth measures the country's economy will likely continue to grow at a reduced clip. Revised Chinese growth expectations from entities such as HSBC, coupled with incontrovertible fundamental facts, further slammed the value of the Aussie dollar today. As a result, the Australian Dollar Trust ETF (FXA) has become one of the market's favorite shorts, declining more than 10% over the past 30 days.
The FXA went into a free-fall directly after Federal Reserve Chairman Ben Bernanke spoke on the topic of ongoing government asset purchases in the United States, falling 1.8% in the short period after Bernanke's open forum statements. The suggestion that the paper floodgates will, possibly, at some uncertain point in the next year, begin to close, caused the USD to jump almost 1% in value. The new valuation of the greenback, in conjunction with the relative appeal of U.S. Treasury bonds in volatile market conditions, has broken up long trades in higher-yield risky assets held by more risk-averse investors, including many investments in the FXA and the Australian dollar. The presently occurring drop in value has not, however, translated into the improvement in Australian equity markets that some had expected. Robert Rennie, chief currency strategist at WestPac, stated in a Sydney Morning Herald piece downward pressure on Australian equities seen today was simply a knee-jerk response to the sharp drop in American equity markets, and that it would not be a lasting concern.
The Reserve Bank of Australia had, prior to Mr. Rennie's comments, stated that it would welcome a decline in exchange rate as a means to improve its export prospects (less natural resources), and there have been suggestions that the central bank is not concerned with the slumping value. If this is the case, and the U.S. dollar and bond markets continue to strengthen (a possibility that at this juncture seems very likely), it would not be unreasonable to expect that the FXA will continue its slide unmolested by policymakers. The short side for this particular fund is a crowded one, but there is no particularly compelling reason to suggest that the currency and its related derivatives are oversold. Worldwide weakness in equities markets will continue to build central bank support for weak currencies, particularly in export-driven economies, and Australia could even be swept further into the stream of central bank easing if results from this natural downturn develop growth opportunities down under.