Positioning More Bearishly Vs. The Australian Dollar As It Loses 2012′s Gains

I have been writing more and more bearishly on the Australian dollar this year (for example, see "Reserve Bank Of Australia Seems Biased Toward More Monetary Easing"). After BHP Billiton (BHP) announced it would close a metallurgical coal mine in Queensland, my alarm bells rang even louder. BHP was unable to resolve a severe labor dispute that Queensland Resources Council chief Michael Roche claims will eliminate about $1B AUD in export revenues.

Other companies with metallurgical coal mines, like Consol Energy (CNX) and Alpha Natural Resources (ANR), seemed to benefit from the immediate aftermath of this news with one day price pops of 3.0% and 10.0%. However, the more lasting impact is likely on Australia's terms of trade. The Reserve Bank of Australia has repeatedly noted that Australia's terms of trade have peaked and this mine closure likely further confirms that peak. Moreover, turbulence in Australia's mining industry is unwelcome at a time when it is leading the way in an otherwise softening economic environment. On the encouraging side, St. Louis-based Peabody Energy (BTU) struck a new three-year labor deal with miners at its North Goonyella Mine in Queensland. Going forward, I will be watching ever more closely how the resources industry fares, especially with the onset of new mining taxes.

As the RBA gets more dovish and economic conditions apparently begin to weaken a bit, the Australian dollar has notably faded against the U.S. dollar. In particular, the Australian dollar has given up all its 2012 gains. The chart below shows the Australian dollar versus the U.S. dollar currency pair, also tradable via the Rydex Currency Shares Australian Dollar Trust ETF (FXA).

Note that the uptrend from the October lows broke once the Australian dollar lost all its 2012 gains (which also corresponds to the close from 2010). However, after six more trading days testing those levels, the Australian dollar actually experienced a bounce back into the downtrend line measured from the 2012 highs. I am guessing that the downtrend will dominate the movement in the Australian dollar and eventually take it through a break of support.

The Australian dollar struggles to hold onto support versus the U.S. dollarClick to enlarge

The Australian dollar struggles to hold onto support versus the U.S. dollar

Source: FreeStockCharts.com

As the Australian dollar struggles to hold on against the U.S. dollar, it has managed to stop the sharp under-performance versus the S&P 500 (SPY). The S&P 500 almost seems to have peaked against the Australian dollar right at the same point it peaked in 2011. I find this behavior particularly notable when juxtaposed with the increasingly bearish positioning of traders against the Australian dollar according to Reuters and the Commodity Futures Trading Commission. Is the Australian dollar "hinting" at lower levels for the S&P 500? This same report showed dollar longs at their highest level since June, 2010…that was a very volatile summer…and the S&P 500 peaked against the Australian dollar at that time as well.

Has the outperformance of the S&P 500 ended just as the Australian dollar seems set to weaken further?Click to enlarge

Has the outperformance of the S&P 500 ended just as the Australian dollar seems set to weaken further?

Source: Stockcharts.com

I am currently positioned for one more short-term bounce in the Australian dollar with longs against the U.S. dollar, the Swiss franc, and the Japanese yen (spreading the bets) while quickly building a sizable short position using the British pound. It is an odd position for me not just because I have a long-standing bearishness against the pound only outlasted by my former bullishness on the Australian dollar: over the past two to three years, I have very rarely taken the short side against the Australian dollar, not even to hedge.

GBP/AUD looks set for a fresh surge higherClick to enlarge

GBP/AUD looks set for a fresh surge higher

Source: FreeStockCharts.com

Be careful out there!

Disclosure: I am long CNX, ANR, BHP.

Additional disclosure: I am also long SDS and calls on SSO.