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ETFsRule (99.94)

A Cynical Investment Idea: Profit From Australia's Misfortunes

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February 23, 2011 – Comments (2)

I just came across an article which makes a pretty convincing case that there is still a massive housing bubble in Australia, which for some reason hasn't burst yet. It sounds like a ticking time bomb to me.

Here's the idea:

When the housing bubble burst in the states, it caused a temporary spike in the US dollar. If the same thing happens in Australia, then we should see an increase in their currency, right?

Only this time it won't be temporary: the Australian dollar should jump in value, and from there it should just keep rising, as their houses drop in value and unemployment rises.

The annual inflation rate in Australia is currently at 1.48% and dropping rapidly, according to this source:
bpp.mit.edu/daily-pric...

If their markets crash, they could be in for a serious "deflationary spiral". Forget about stocks... the safest and best way to play this scenario is simply to buy and hold Australian dollars.

And don't worry about their interest rates: it's the inflation rate that matters (I think). My plan is to hold Australian dollars until their inflation rate is higher than ours... which I don't think will happen for quite some time.

I'm thinking of making this trade in my real-life portfolio, and this will be my first currency trade ever... so if it sounds like a stupid idea, please let me know!

2 Comments – Post Your Own

#1) On February 23, 2011 at 3:42 PM, checklist34 (99.70) wrote:

the increase in the US dollar wasn't due to the housing bubble bursting, it was due to worldwide panic after Lehman.  Its still, despite all the people that mock it, a flight-to-safety currency, witness last summer and fall of 2008. 

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#2) On February 25, 2011 at 12:01 PM, ETFsRule (99.94) wrote:

Thanks for the comment. I think you're partially right - at least some of the increase was due to the USD being a flight-to-safety currency. But we also saw spikes in other currencies at the same time (Canada, the Euro, etc). They jumped in comparision to the currencies of countries that didn't have a housing crash at that time (Australia, Japan).

I still think there are a lot of factors that will result in falling prices in Australia (deflation) going forward - even if it doesn't happen as a sudden jump.

I'm planning to make the trade as soon as I get approved for FOREX. I'll just make a small investment, and split my position putting half in AUD/USD and half in AUD/RUB. Russia seems like they are in danger of runaway inflation: their interest rates are around 7.75%, but their inflation rate is almost 10%. Anyway, it should be educational even if I don't make any money from it.

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