CurrencyShares Australian Dollar Trust (AMEX:FXA)

gotta love the dollar...the austrailan one anyway..one of the few countries not trying to eat its own young with massive money printing and huge debt....good dividend also

currency - australian - lower yield

Good dividend yield and commodity currency. It gets whacked occasionally but long term USD is going to go weak and so commodities will benefit. Hence FXA has 15% upside including dividends.

With the PIIGS, Euro is trash, US hitting debt ceiling and concerns of a downgrade Canadian Dollar and Australian dollar look as potential places for people to move. The Auzzies will hike rates which will attract capital from around the country. I believe this will at least for awhile become the new "flight to safety" at some point.

The Aussie Dollar is inflated by both a commodities bubble and a housing bubble. I would bet on the US Dollar over the Aussie Dollar right now. At the very least, I don't believe the Aussie Dollar will outperform the S&P over a long-term timeframe.

Carry trade and risk appetite gone too far.

To those who may have grown up during the 80?s there was this comedy called “Crocodile Dundee”. It was about an outback game hunter thrown into the streets of NYC and how out of place he looked while trying to prevent the damsel in distress from getting killed by drug runners. Based on previous market actions of the past few sessions over a couple of months, the Aussie dollar is beginning to look just as out of place. Don’t get me wrong, I am by no means a short or do I actively engage in the process of finding shorts. I just can’t handle the emotional pressure of being exposed to a trade that can literally bite my ass cheeks off. I value my sleep above all else. However, sometimes in my search for the next investment idea, it can lead me to a weird tangent in a direction I would never suspect.

Before I dive into my recommendations you must understand the environment for my thesis. The Aussie economy is dependent primarily on exports with mining/natural resources accounting for over 37% of their exports. It is because of their heavy reliance on resources, they have been enjoying the commodities boom for the last 10 years and the AUD/USD exchange rate has reflected this. Their exchange rate has risen from a low of $.65 USD to almost full parity. This has resulted in record low unemployment of 4.4% in 2009. This prosperity has lead to a CPI of 4.4% with an avg annual inflation rate of 3%. Their M1 money supply has grown 10.1% on avg and M2 has grown 15.3%. Their central bank has raised rates several times to put the brakes on inflation. Their main export customers are as follows:

1) Japan 13.7%

2) China 14.3%

3) South Korea 7.7%

4) India 5.8%

As everyone can see, they have benefited from the economic boom in Asia especially from China. With China being the factory for the world they require commodities they they simply lack due to poor geography. Remember the old saying “Geography is destiny”? Although this has worked out well for both parties, the main problem about putting too much reliance on a commodities economy is that there are always serious feast or famine cycles. As a corporate forest products buyer, I should know. Based on recent economic data the PMI of their biggest trading partners has begun to show signs of manufacturing slow down which translates to less exports:

Japan (53.9 from 54.7)

China (52.1 from 53.9)

South Korea (53.3 from 54.6)

India (57.3 from 59.0)

Since we live in a globalized economy, every one of these trading partners are reliant on the American consumer. A retail slowdown here means less orders over there which leads to a decreased need for commodity products. You can’t expect a hit to 1/3 of your economy and not have a very bad day. This will not happen suddenly but it will happen. Another serious head wind is their idiotic decision to hit their Mining/Resource sectors with a massive mining super profits tax of 40%. Talk about an Aussie boomerang! This was the brainchild of the former labor party prime minister Kevin Rudd. How can you expect to stay in charge if you want to kill off 40% of your economy. This stupid idea of the week lead to his ouster to be replaced with Julia Gillard who will assume leadership of the labor party in preparation for next year’s elections. The opposition has vowed that if they win they will scrap this tax completely. If this were to happen i would be very bullish and take long positions. She seemed more practical and reduced the tax to 30% but only on Iron & coal. The mining companies will also be allowed to accelerate depreciating of all existing projects. The 40% resource tax will still be imposed on oil and gas developments. It’s an improvement, but not by much. This still creates a high degree of uncertainly in the mining industry and could force out the smaller players since the additional tax burdens will make it harder for them to raise financing for new projects. If their key export markets begin to weaken further, it will create additional pressures on this currency. In return for making the mining tax more palatable, there was a price to be paid. The corporate tax was due to be reduced to 28% from 30%. Instead, the corporate tax will now be reduced to 29% starting July 1, 2013.

Another thing from a technical analysis perspective, it formed a death cross pattern a couple of weeks ago. This is when the 50 day moving average falls below the 200 day moving average. This is a very good bearish signal especially when the 200 DMA has been trending downward as well.

So how do we play this? One way is to short the currency futures or invest in the futures options. Since I’m a small investor I don’t have enough capital to make this work for me. Another alternative is to short (FXA) the Currency Shares Australian Dollar ETF. It may may be right for you but not for me. Remember, I value a peaceful night’s rest above all else. Besides, the only shorts I will ever do are covered calls. The final way to do this is to buy the FXA put options which is what i did. If I’m only wrong I only lose my initial premiums paid. According to Warren Buffet, it’s never okay to lose capital, but it’s better to lose that than to expose myself to unlimited losses. I purchased 5 contracts of the December 81 put strikes when it was at $82. It hasn’t been cooperating for the last 2 weeks, but it looks like the trend is beginning to assert itself. Hopefully, reality finally begins to kick in.

“G’day Mate!”

Currencies backed by strong commodities exposure look good to me.

australia raisin interest rates

Australia is commodity rich; its currency will reflect that for the months ahead.

Dollar crash

Fuels Asia with commodities. Sound government policy.

I believe the US dollar is overheated and will fall against many other 1st world currencies. How far is debatable but certainly the USD has enjoyed surprising strength and seems overbought to me. The AUD is a good bet as it follows global commodity prices which I am overall bullish on.

$ and equities are in trouble

FXA holds Australian dollars and is paying a 5.21% dividend. A play on the dollar dropping further.

With all those commodities, I expect the Aussie dollar to remain strong for a long time.

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Positive Balance of Trade will drive AUD Higher

Gotta love those commodity currencies... watch it run.