Sell the Aussie dollar v Long the British pound
SBM has covered this trade, selling the so called “Aussie” against the (not so) Great British pound on our renowned blog, on numerous occasions over the last nine months. On each of these calls we have made money. The recent weakness in the pound on fears over a downgrade in its long held AAA rating by the Sovereign debt agencies and renewed “dovish” noises out of the Bank of England, lean us, contrarianly, towards the bull pound / short Aussie trade once more. Let us explain...
“The Aussie dollar has been a hot ticket for yield hunters for nearly four years now, being shored up by central banks looking to diversify their extensive foreign exchange reserves out of the US dollar.” The Aussie dollar has been a hot ticket for yield hunters for nearly four years now, being shored up by central banks looking to diversify their extensive foreign exchange reserves out of the US dollar. The central banks, along with a large volume of speculative money, have piled into the currency in recent years. The Aussie has enjoyed the fundamental support of Australia’s triple-A credit rating, high interest rates relative to most other Western nations since 2010 reaching a peak of 4.75% during the summer of 2011 (although steadily declining since then) and a strong domestic economy buoyed by strong demand for its commodity exports from the rest of the world.
Take a look at table 1 below which charts the movement of the Australian Reserve Banks base rate. You will see that since October of 2011 the reserve bank has in fact been reducing rates in response to a slowing domestic economy. Anybody who has visited Australia from the UK in recent months will vouch for just how expensive the country now is — similar to the situation in Switzerland in 2011 when stories of £10 coffees abounded, and just before the Swiss Franc depreciated extensively. Tales of £7 beers and £200 meals for two are legion — real anecdotal evidence of a currency out of kilter.
CHART - AUSTRALIAN RESERVE BANK INTEREST RATE HISTORY
February 2013
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