China Slowdown May Impact Forex Trading

by: Paulo Santos

I've been writing a series of articles on how China's slowdown, particularly an investment slowdown, will have a significant impact on several sectors, such as steel and copper.

China's investment slowdown, however, won't just impact certain sectors and products. It will probably also have an impact on some foreign exchange rates. This happens because a few countries now have China as their main export destination, and these exports are concentrated on sectors that will be affected by the investment slowdown.

Two of the most obvious victims are the Australian dollar (NYSEARCA:AUD) and the Brazilian real (BRL).

Australian Dollar

China is now Australia's main export destination, and the crushing majority of what Australia sells to China is minerals, iron ore chief among them. In 2010, 67.2% of Australia's exports to China were minerals.

Since steel is bound to be one of the sectors most affected by the investment slowdown, iron ore prices and quantities are probably going to suffer considerably. This should be enough to hit the Australian dollar.

Some Australian equities that could be hit in context of this investment slowdown are BHP Billiton (NYSE:BHP), Sims Metal Management (SMS) and Alumina (AWC).

Brazilian Real

China has also become Brazil's main export destination, surpassing the U.S. China now answers for 17% of Brazil's exports, and within these iron ore is around one-fifth of the total, with soybeans and oil representing another 15%.

While still very relevant for Brazil's exports, China's investment slowdown impact should be considerably less than in Australia's case. Still, some impact is to be expected.

Some Brazilian equities that could be hit in context of this investment slowdown are Rio Tinto (NYSE:RIO) and VALE S.A. (NYSE:VALE).


China's investment slowdown will have a forex impact as well, with the Australian dollar showing up as the most vulnerable of the currencies we analyzed, with two-thirds of Australia's exports to China being minerals. Other than the equities we named, this expected movement can also be traded by shorting the Australian dollar ETF (NYSEARCA:FXA), currently trading at $106.07.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.