Aussie Falls as Economic Performance Deteriorates

The Aussie fell against major currencies on Tuesday as Australia's economic performance deteriorates. The Aussie fell below parity against the U.S. dollar for a while, but has since recovered. Presently, the greenback trades around 0.9817, or 0.02% above its previous close. At the same time, the Aussie suffered heavy losses against the euro as the European currency added 0.49% to its value to stand around $1.3987.

Investors are panicking in the aftermath of the historic downgrade of the U.S. debt. The situation can be best described by the old saying: “When America sneezes, the whole world catches a cold.” In fact, it seems the rest of the world is suffering more than the U.S. at the moment. In light of this panic, the Aussie was not helped by weak data coming from the Australian economy. For instance, home loans stagnated in June, when most analysts expected them to grow 0.8%. In May, home loans increased 2.8%. At the same time, the economy shed 5,400 jobs in the June quarter, the economy's worst performance since 2001. Australia's business confidence remains subdued as well. According to National Australia Bank, business confidence slid to -1 in July, from 2 in June, and remained close to its 6-month low.

The Australian government has more to worry than its own economy. The government should be watching closely the situation in China, where repeated attempts to control inflation are not producing expected results. In July, China's CPI rose 6.5%, compared to the same month a year earlier. In May, the inflation number stood at 6.4%. Rising inflation comes in spite of five interest rate increases since 2010. China's economy has been growing rapidly throughout the financial crisis. Now, there are increasing signs that the world's second largest economy is overheating. Therefore, many analysts might expect further belt tightening by the Chinese authorities.

As a major commodities exporter, Australia has come to rely on China to provide steam for its economy. Presently, China is the world's largest consumer of raw materials, and its insatiable appetite for commodities has been lifting the economies of Australia, Brazil and other major commodity exporters. Many of China's trading partners might fear that any deterioration in the economic performance of the Asian Dragon will soon be felt in their own economies.

Australia's recovery from the Queensland floods might be also under threat from falling commodities' prices. On Tuesday, crude oil fell below $80 mark. Presently, it trades around $78.89, or 2.45% below its previous close. Natural gas also retreated behind psychologically important $4 barrier. At the moment, natural gas is trading around $3.904, or 1.54% below its previous close. Silver also fell 0.45% to stand around $38.88. The one exception is gold as the yellow metal continues to set new records. Presently, gold trades at $1,748.55, or 1.63% above its previous close.

ACTION ITEMS:

Bullish:
Traders who believe that commodity prices can rebound, which should provide a boost to Australia's economy and currency, might want to consider the following trades:

• Dow Jones-AIG Commodity Index Total Return ETN (NYSE: DJP) is a long play on commodities. DJP may rise if the prices of commodities increase.

• CurrencyShares Australian Dollar Trust ETF (NYSE: FXA [FREE Stock Trend Analysis]) is a long play on the Aussie. FXA may rise if the Aussie appreciates.

Bearish:
Traders who believe that the Aussie is already overvalued, and that weaker economy will push the Aussie to more realistic levels, may consider an alternate positions:

• PowerShares DB Commodity Short ETN (NYSE: DDP) is a short play on commodities. DDP may rise if the prices of commodities decline.

• ETFS Short Australian Dollar Long US Dollar ETC ETF (SAD) is a short play on the Aussie. SAD may rise if the Aussie depreciates.