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 falling interest 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)
From the Archives…
Get Ready to Pin Back Your Ears With Gold Stocks
27-07-2012 – Dr. Alex Cowie
The Upcoming Interest Rates Shock You Should Prepare For
26-07-2012 – Kris Sayce
Don’t Believe ‘the Bull’ on Australian House Prices
25-07-2012 – Kris Sayce
Why the Melbourne Property Market Could Be Set For Two Years of Pain
24-07-2012 – Dr. Alex Cowie
The End of Growth Through Currency Wars
23-07-2012 – Dan Denning