(This is an excerpt from an article I originally published on Seeking Alpha on March 31, 2015. Click here to read the entire piece.)
Over the weekend another wave of rumors about plans for economic stimulus in China made the rounds. These rumors were credited for helping to drive China’s Shanghai index toward a 7-year high. The impact was notable on the iShares China Large-Cap (FXI) as it rose 3.8% to levels last seen in the summer of 2011.
Under these circumstances one might expect Australia to be a prime beneficiary of this stimulus-drive run-up. {snip}
Australian stocks are showing an inclination to trade inversely to the soaring fortunes in China’s equity markets. {snip}
Source for charts: FreeStockCharts.com
Based on the trading action, it seems China’s policy moves are increasing/confirming worries that China’s growth slowdown will hurt Australia for the foreseeable future.
Meanwhile, expectations for an April rate cut from the Reserve Bank of Australia (RBA) are on the rise again. {snip}
Source: ASX RBA Rate Indicator
At the same time, speculators have surprisingly moved counter to these expectations for a rate cut. {snip}
Source: Oanda’s CFTC’s Commitments of Traders
We now have the Australian dollar and equities moving inversely to the rally in Chinese markets. We also have speculators – who have generally traded successfully on trend in the Australian dollar – diverging from expectations for a rate cut next week. {snip}
As rates edge lower, the RBA is staring down an incipient housing bubble in Australia’s major cities. {snip}
Yet, given the wild swings that have occurred in currency markets lately, I cannot help but wonder whether these tensions for the RBA and its currency will boil over into some major dislocation (lower). {snip}
{snip}
Be careful out there!
Full disclosure: net short the Australian dollar
(This is an excerpt from an article I originally published on Seeking Alpha on March 31, 2015. Click here to read the entire piece.)