I keep thinking that any day now the Australian dollar will take a
dirt nap. It took one back in mid-2008, falling a stunning 39 percent
in just three months in the midst of the credit crunch. This shows just
how vulnerable the Aussie can be to a growth accident that slams the
world economy; it is the premiere risk currency among the major dollar
currency pairs.
Global growth is fading fast again, and copper seems to be
highlighting that story. It could be lights out for the Aussie again if
that’s the case.
As you can see in the chart below, the copper futures weekly uptrend
line is broken, and the primary trend is down. The yellow rectangular
box shows what happened in the midst of the great credit crunch of 2008.
And as you may know, copper is considered a key industrial metal; its
price movement is often used as an indicator of the direction of growth
in the global economy.
Copper Has Taken on an
Important Role in Financing
Important Role in Financing
An increasing number of Chinese firms have been stockpiling the metal
and using it as collateral — because the government’s measures to curb
inflation have limited the firms’ access to credit. Such financing
links the price of copper to other key elements of the Chinese economy,
including the growing speculative real estate bubble.
China’s tightening monetary policy has made it more difficult to
access credit through official channels. As a result, Chinese small-
and medium-size enterprises have increasingly turned to copper for use
as collateral in loans, which are then funneled into other sectors of
the economy.
The falling price of copper means that the collateral initially put
up for the loans in yuan is no longer worth what it once was,
decreasing the likelihood that the borrower will be able to pay back the
loan.
If firms default on debts, then others connected in the chain will
default — and determining where loans have been invested is nearly
impossible.
Banks and state-owned enterprises (SOEs) are also potentially
vulnerable. A high number of SOEs have also used copper as collateral.
These firms are often involved in the real estate sector — even if
their primary function is not always directly linked to it — and are
therefore exposed to the country’s growing real estate bubble.
The government would bail out the more politically favored SOEs if
necessary. But that would leave fewer resources to be allocated to the
private sector, which is crucially important to China’s growth.
It is all about feedback loops. And …
This One Could Turn Quite Vicious
for China and In Turn the Aussie Dollar!
for China and In Turn the Aussie Dollar!
The Australian economy is highly dependent on China for its own
growth. For a while now, I’ve been saying that Australia has
effectively become a satellite country of China. Take a look at this
chart showing China’s imports from Australia thru September.
Lower copper prices could put a real damper on Australia’s growth.
Another major hit is already in play: Falling consumer demand from the
euro zone and the U.S.
And if the bubble were to finally pop in Chinese real estate, it would be much uglier indeed.
So we have the potential for real demand in copper and other
commodities to decline sharply. Toss in the added thumping from the
internal Chinese speculation, which would likely push the metal back
toward its credit crunch low, and you get another 50 percent decline in
the red metal.
And guess which currency has been tightly correlated to the price of
copper over the last few years? If you said the Aussie dollar, you
were right on!
There are two key takeaways from the following chart of the Aussie/U.S. dollar vs. copper:
1) There is a very large divergence between the two price series; and
2) In the past the series have been highly correlated.
I suspect we will see a big move one way or the other. It could be copper soars. But for now, I’m betting the Aussie tanks.
Stay tuned.
Jack
