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Australia Slips on a Bunch of Greece
Sydney and Athens may be 10,000 miles away from one another, but the financial markets behave as though they're next-door neighbors. The financial turmoil in Greece has knocked the Australian dollar down to a six-year low, which is probably low enough to provide a nice buying opportunity.
The Aussie dollar did not fall to a six-year low for no reason, of course. It's quite the opposite: It fell for many reasons, none of which have much to do with Greece.
The reasons have names like "coal," "iron ore," "crude oil," "gold," "wheat" and "soybean."
Stated simply, the Aussie dollar has been falling because commodity prices have been falling. The chart below shows just how close the connection can be for the Australian dollar and commodity prices.
Because the Australian economy relies heavily on natural resource industries like agriculture, mining and energy production, the Aussie dollar tends to track the price trend of the major commodities. That's why currency traders consider the Aussie dollar to be a "resource currency," much like the Canadian dollar and the South African rand.
But the Aussie dollar also possesses a second identity - a financial alias, if you will. It is a "risk asset."
A "risk asset" is the type of asset investors sell in times of uncertainty and market volatility. It is the opposite of a "safe haven" asset like a U.S. Treasury security.
"Investor appetite for risk assets swings considerably over time," Investopedia explains, "[Which is why] market-watchers [refer] to times when investors have substantial appetite for risk assets as 'risk on' periods and intervals of risk aversion as 'risk off' periods."
The Greek turmoil, coupled with the steep sell-off in Chinese stocks, has triggered a classic "risk off" episode. Fearful investors are rooting out their risk assets and kicking them to the curb.
The Aussie dollar is one of the many assets to feel the harsh toe of the boot. Here's how a recent Bloomberg News headline explained the Aussie dollar's plight:
Aussie Drops Below 75 Cents for First Time Since 2009 on Greece
In the news story that followed, Bloomberg reported:
The Aussie dropped below 75 U.S. cents to a six-year low as the heightened risk of a Greek exit from the euro added to slumping commodity prices in spurring traders to sell the South Pacific nation's currency.
Australia's dollar was already sliding as iron ore, the country's biggest export earner, tumbled amid a glut in supply and concern that demand will shrink as China's economy slows...
"Aussie is a currency that nobody really wants to have at the moment," said Ray Attrill, global co-head of currency strategy at National Australia Bank Ltd. in Sydney.
True statement. But the fact that "nobody wants the Aussie at the moment" does not make it a "Sell." To the contrary, the Aussie dollar looks like the proverbial baby thrown out with the "risk asset" bathwater.
Even though the Aussie dollar and Greek stocks are both risk assets, they are not equally risky. In fact, based upon underlying fundamentals, the Aussie dollar seems much more dependable and trustworthy than the "safe haven" U.S. dollar.
For one thing, the Australian economy has been growing faster than the U.S. economy during the last few years. But much more importantly, Australia's government debt load is miniscule compared to that of the U.S.
These "big picture" data points tell us nothing about when the Aussie dollar might stop falling, but they do tell us that the Aussie does possess fairly solid underpinnings.
Obviously, the Aussie dollar could continue slumping. Many are the currency "experts" who are calling for it to drop to $0.72, or even lower. But this pervasive negative sentiment is just one more reason why it may be close to a major low.
Yes, commodities are tanking... and so is the Chinese stock market. But on the other hand, the Aussie dollar is cash - cash that yields a possible number. Furthermore, the bad news surrounding the Aussie dollar is well-known and amply reflected in a wide range of sentiment indicators.
Here's one very telling anecdote:
ProShares has been operating two Australian dollar ETFs using the clever stock symbols "GDAY" and "CROC." GDAY, which provided leveraged exposure to a rising Aussie dollar, enjoyed very few good days during its three-year lifespan. So ProShares shuttered the fund last month. CROC, which provides leveraged exposure to a falling Aussie dollar, is still going strong.
Here's another sentiment indicator...
The cost of buying put options on the Australian dollar (a bet that it will fall) just hit the highest level of the last six months.
In other words, most investors are more eager to bet the Aussie dollar will fall than to bet it will rise. As "contrarian indicators," this pervasive negative sentiment suggests that a turn in the Aussie dollar is near.
So when you add it all up - the short-term sentiment indicators, the likelihood that commodity prices are bottoming, and the Australian economy's strong underlying fundamentals - the Aussie dollar seems better bought than sold at the current quote.
We would not be surprised to see the Australian dollar bounce along the bottom here for a while. But over a two- to three-year time frame, the Aussie looks like a keeper.
One of the easiest ways to gain exposure to the Aussie dollar is to buy the CurrencyShares Australian Dollar Trust (NYSE: FXA; Price: $74.21). This ETF tracks the price of the Aussie dollar very closely while also yielding about 1.3%.
Another way to access the Aussie dollar would be to buy it directly through EverBank - a U.S.-based bank that specializes in foreign currency accounts and certificates of deposit (CDs). [For the sake of full disclosure, we have a longstanding relationship with EverBank in which we receive compensation to market their products.]
The Australian dollar is one of the many currencies and CDs available on the EverBank platform. In addition to offering deposit accounts and CDs denominated in a single foreign currency, EverBank also designs CDs that hold baskets of foreign currencies based upon specific macro-economic trends or phenomena.
Good investing,
Eric J. Fry
For The Non-Dollar Report
P.S. As we mentioned last week, EverBank is also offering a new five-year CD it calls the "MarketSafe® Power MetalsSM CD."
"We've combined the power of gold, silver and copper in our latest MarketSafe CD," EverBank explains. "You'll have the potential to earn an upside payment at maturity capped at 45% if the metals gain, and if they decrease, you're totally covered with 100% protection of your deposited principal. Keep in mind, returns are based on CD performance - no Annual Percentage Yield or periodic rate of interest is paid on the CD."
To check out all the details and important disclosures about this new five-year MarketSafe® Power MetalsSM CD, click here:
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