Mike’s note: Mike Merson here, managing editor of the Market Minute.
Regular readers know I love to feature the ideas of talented traders in our network. And lately, I’ve been in contact with a legendary trader by the name of Andy Krieger…
Andy regularly trades positions in the hundreds of millions, if not billions of dollars… And once made the front page of the Wall Street Journal for booking a $300 million profit “breaking the Kiwi” (shorting the New Zealand dollar).
Lately, Andy has been sending me his timely market analyses. And yesterday, he sent me a case against the Australian dollar I found so compelling, I just had to pass it along. You can read it in full below.
And if you haven’t already, be sure to sign up for Andy’s BIG trade event on February 20 at 8 p.m. There he’ll reveal the details of an imminent Black Swan event he sees coming this year… including how to prepare your retirement account… and select seven lucky attendees to receive his highest level of trading research completely for free.
February 10, 2020
The Australian dollar (AUD) has been under heavy pressure lately. And it shows no signs of stopping.
Since the start of 2020, the AUD has lost over 5% of its value relative to the U.S. dollar (USD). That’s a significant move for a major currency…
I’ve been short the Aussie dollar for some time, and that trade has paid off handsomely. But it’s still one of my favorite shorting opportunities right now.
You see, the positive performance of the AUD during the first part of the last decade was largely fueled by the powerful growth of the Chinese economy. As the Chinese economy roared ahead with astonishing growth rates, Australian exports to China surged along with it. (In fact, the Chinese economy accounts for 38% of all of Australia’s exports.)
In other words, the success of the Australian economy has largely been tied to the success of the Chinese economy.
Now, though, the Australian economy is facing headwinds.
The U.S.–China trade war slowed the Chinese economy significantly, digging into the exports of Australia…
The bushfires have caused massive property damage, terrible loss of wildlife, and the almost unimaginable destruction of 186,000 square miles of terrain…
And just when things started looking better – with the partial resolution of the trade war, along with heavy rains to put out the raging bushfires… The country is now faced with its biggest challenge yet: the coronavirus outbreak in China.
As a result, the land down under is getting clobbered again… and its currency along with it.
Just take a look at the chart below…
In January 2018, just over two years ago, AUD was worth $0.8110 USD. (Meaning AUD was worth about $0.81 per U.S. dollar.)
On Friday, the pair closed around $0.6675. That’s the lowest level in nearly 11 years… and the fundamentals suggest it may have much further to fall.
So, it’s already dropped nearly 18% over the past two years… What could possibly cause it to fall further?
As I mentioned above, the coronavirus is the biggest threat
Remember, the Chinese economy makes up over one-third of Australia’s exports. And the coronavirus has the potential to severely impact the Chinese economy…
It’s still too early to say how weak the first-quarter economic numbers coming out of China will be. But many economists forecast they’re somewhere between ugly and absolutely hideous.
As the coronavirus has brought much of the Chinese industrial production and travel to a standstill, I think these numbers are likely to collapse in the first quarter of 2020… And lead to a knock-on effect which drives the AUD down to levels we haven’t seen in nearly 20 years.
And there’s another key headwind for the Australian dollar…
It’s very possible, depending on the scale of the coronavirus impact, the Reserve Bank of Australia could be forced to act and cut interest rates further. Aggressive monetary
easing – through not only interest rate cuts, but potentially even quantitative easing (money printing) – could very well be the result. This would weaken the AUD further.
Now, I am not forecasting that we’ll see the AUD trade down to less than $0.50 per USD (its lowest rate ever was $0.4780 back in April 2001). It’s premature to paint that bleak of a picture…
But if China’s economy goes into a real tailspin as many predict, then we should expect the AUD to follow. A move towards the lows of 2009, around the $0.6010 level, is certainly realistic. That would be another 10% drop.
Even a move to $0.6250 would be a big move, and that is entirely reasonable if the coronavirus inflicts much more damage to the Chinese economy.
I’ll refine my forecasts over the coming weeks as we see how things play out.
In the meantime, though, currency traders can look to trade this move by looking to sell short the AUD/USD currency pair between $0.6705 and $0.6735, risking about 1% on the trade. That would offer an excellent risk/reward ratio on the position.
Editor, Andy Krieger Trading
P.S. Next Thursday, February 20 at 8 p.m. ET, I’ll reveal the details of an imminent Black Swan event that could have a serious impact on your wealth…
If you follow my advice and position yourself correctly, you stand to make a fortune… Ignore it, and you may be putting yourself in immeasurable risk.