Why You Should Short the Australian Dollar | ASXnewbie.com

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Why You Should Short the Australian Dollar.

by strudy1

The best way to profit from China’s decline, the most obvious play to us is a speculative one – to go short the Australian dollar.

The Australian economy is highly geared towards China’s success. Australia sells commodities, China buys them. If China’s demand for commodities falls – which it has – then Australia’s economy loses one of its key drivers.

Throw in a bursting house price bubble, and you have a recipe for fallinginterest rates and a weakening currency.

The Australian dollar has taken a few knocks in recent months, but it has rebounded somewhat from recent lows. It fell below parity with the US dollar at one point, but is now well above it again.

This resilience is partly due to hopes for more monetary easing from central banks in general. But it’s also got quite a lot to do with the Swiss central bank.

The Swiss are artificially suppressing the Swiss franc against the euro. They don’t want their currency to be forced higher by people fleeing the carnage in Europe. That means they have been forced to buy euros. They don’t want to end up sitting on loads of euros in their reserves, so they have to swap them for something else. That ‘something else’ includes currencies such as the Swedish krona, the Canadian dollar, and the Aussie dollar.

This can’t last forever. Either the Swiss will be overwhelmed and have to break the peg, or Mario Draghi will actually do something effective this week and the flight from the eurozone will ease off.

John Stepek
Contributing Editor, Money Morning

Publisher’s Note: This article originally appeared in MoneyWeek (UK).

This article is contributed by Money Morning. Click Here to Subscribe to their free newsletter.