- Australia is a supermarket for the Chinese.
- Trade weighed on the Australian dollar in 2018 and 2019.
- Coronavirus is the new problem.
- Australia has a compelling book value.
- FXA moves higher and lower with the Australian dollar vs. the U.S. dollar currency pair.
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I was born in Brooklyn, N.Y., in 1959. Aside from a few years in the UK, I have spent my entire life in the United States of America. My younger brother took a different path. After graduating from college, he left the US on a journey that took him down under, to the land of wonder.
For over three and one-half decades, my brother has lived and raised his family in Australia. My sister-in-law, niece, and two nephews are Australians, and my brother has been a citizen of the nation for decades. I have visited Australia several times, and while the trip is long and torturous, it truly is the land of wonder.
Australia is rich in natural resources, from minerals and energy to the agricultural products that feed people around the globe. Australia has a massive landmass, but a small population. The close geographical location to China, the world's most populous country, makes it a supermarket for the Chinese. As China is Australia's leading customer, its economy follows the Asian nation. Economic travails in China over recent years has weighed on the value of the Australian dollar versus the US currency. The Invesco Currency Shares Australian Dollar Trust product (NYSEARCA:FXA) replicates the price action in the A$ versus the US dollar currency pair.
Australia is a supermarket for the Chinese
Mineral-rich Australia exports iron ores and concentrates, coal, natural gas, gold, aluminum ores, beef, and a host of other commodities. In 2019, Australia's top trading partner was the world's most populous nation, China.
Source: Australia's Top Trading Partners
As the chart shows, exports to China dwarfs the level of Australian goods flowing to other counties around the world. China accounted for around one-third of all shipments by dollar value in 2019.
Trade weighed on the Australian dollar in 2018 and 2019
The value of exports from Australia to China moves higher and lower with commodity prices each year.
Source: Australia exports from China
As the chart illustrates, the value of exports dipped in 2015 and 2016 as the Chinese economy slowed. While exports moved higher in 2018 and 2019, they probably did not reach their potential because the escalating trade war between the US and China weighed on Chinese economic growth. Slower growth caused the overall level of demand for raw materials to decline.
The January 15, 2020 "phase one" trade deal between the US and Chinese caused optimism over Chinese growth to return to markets, briefly, but China went from one problem to the next when it comes to the nation's economy.
Coronavirus is the new problem
In China, the outbreak of Coronavirus in January 2020 caused the economy to grind to a halt. At first, the spread of the virus occurred during the Lunar New Year, which masked some of the impacts. However, quarantines and work stoppages as the number of fatalities and reported cases grew created a new challenge for economic growth in the world's most populous counties with the second-leading GDP in the world.
Since one-third of Australian exports flow to China each year, slowing growth in the Asian nation has had a significant impact on the value of the Australian dollar versus the US dollar. The Australian currency is a proxy for both the Chinese economy and commodity prices. Since China is the world's leading consumer of raw materials, the A$ tends to move higher and lower with the commodity asset class.
As the monthly chart shows, the A$ versus the US dollar currency pair reached a peak of $1.1005 in 2011 when commodity prices rose to highs. Since then, a combination of slower economic growth in China and lower commodity prices caused the Australian dollar to make a series of lower highs and lower lows. The most recent bottom came in February 2020 at $0.6437. In late 2019 and early January 2020, the A$ rose above the $0.70 level against the US dollar on the back of optimism over the "phase one" trade deal between the US and China. However, the outbreak of Coronavirus took a toll on both the Chinese economy and the Australian currency.
Australia has a compelling book value
The Australian dollar versus the US dollar currency pair has been trending lower over the past nine years, with the most recent low coming last month.
The quarterly chart displays that the currency relationship has traded in a range from $0.4774 to $1.1005 since 2001. At just over the $0.66 level on March 4, it is well below the midpoint of the band, which stands at just under the $0.79 level.
The Australian dollar is a fiat currency that derives its value from the full faith and credit of the government that prints the legal tender. However, the wealth of commodity assets within Australia's vast borders provides a level of support or backing for the currency. The bottom line is that Australia's small population and enormous landmass create a supermarket for China and the rest of the world, which has compelling value for the nation that has a long history of economic and political stability.
FXA moves higher and lower with the Australian dollar vs. the U.S. dollar currency pair
The Australian dollar is a proxy for both the Chinese economy and commodity prices. Economic growth in China supports rising commodity prices and strength in the Australian dollar as revenue flows increase in the land down under. For those looking to buy the current dip in commodities and China, the Australian dollar can be a liquid proxy.
The most direct route for a risk position in the Australian versus the US dollar currency pair is via the over-the-counter foreign exchange or futures markets. For those who do not venture into the OTC or futures arenas, the Invesco Currency Shares Australian Dollar Trust product provides an alternative. The fund summary for FXA states:
The investment seeks to reflect the price in USD of the Australian Dollar. The Shares are intended to provide institutional and retail investors with a simple, cost-effective means of gaining investment benefits similar to those of holding Australian Dollars. The costs of purchasing Shares should not exceed the costs associated with purchasing any other publicly-traded equity securities.
Source: Yahoo Finance
FXA has net assets of $87.04 million, trades an average of 20,050 shares each day, and charges an expense ratio of 0.40%. The last significant move to the upside in the currency pair came from late November 2019 until the very end of last year that took the A$-US$ currency pair from $0.6756 to $0.7045 on the nearby futures contract, a rise of 4.28%.
Over the same period, FXA rose from $67.56 to $70.33 per share or 4.10%.
The value of the Australian dollar versus the US dollar currency pair dropped to a new low at the end of February on the back of Coronavirus and economic weakness in China. For those looking to buy the dip in the currency that reflects the vast commodity wealth of the land down under, FXA is a product that is available to any market participant with a standard investment account.
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This article was written by
Andrew Hecht is a 35-year Wall Street veteran covering commodities and precious metals.He runs the investing group The Hecht Commodity Report, one of the most comprehensive commodities services available. It covers the market movements of 20 different commodities and provides bullish, bearish and neutral calls; directional trading recommendations, and actionable ideas for traders. Learn more.
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