Ralph Shell @ 1:09 PM, Thursday January 27 2011
After establishing a new high of 1.0255 versus the USD, the A$ has since retreated to a trading area between 98.40 and 100. The consolidation after the highs of December was first caused by concern the Chinese attempts to slow their economic expansion would result in diminished demand for Australian commodity exports. Torrential rains and consequent floods over vast areas of Queensland caused record damage, loss of life and brought coal and other commodity exports to an abrupt halt.
The extensive interference with economic activity has raised fears the GNP of Australia would contract during the clean up phase following this natural disaster. To pay for the clean up of the mess left by scores of broken levees, PM Julia Gillard has proposed another kind of levy. This levy is really a tax, but there is a global revulsion from the word tax, so the PM has chosen to relabel her plans.
Economists have estimated the cost of the flood clean up from $10B up to perhaps twice that amount. This morning, in the Australian Business Spectator, Stephen Bartholomeusz expressed his view that:
"
Julia Gillard’s not-so-great but not-so-big new tax
announced today is an attempted con job, another piece of political
spin. To put the economic significance of the $1.8 billion that will be
raised by the "one-off" levy in perspective, it represents less than 0.5
per cent of the government’s $362 billion of budgeted spending for this
year."
This levy, a new income tax, for 12 months only would tax those whose earning are over $50,000 by an extra 1/2%. Those big earners of over 100,000 would have to pay 1% more. Exempted from this reconstruction tax are those affected by the flood.
It is perplexing that PM Gillard proposes a controversial tax that produces such a small percentage of the clean up funds required. She has also proposed cuts in the carbon abatement expenditures that will inflame the passion of the environmental zealots in the Green Party, whose support she needs to maintain her majority. This story has the possibility of becoming a real donnybrook and needs to be closely monitored.
We have been cautious bears on the A$. Refer to comments on 01 14 2011 "Is it Time to Sell the Australian Dollar?" There are no changes in our views and the inept political handling of the flood financing may give the market a reason to pay closer attention to the Aussie Dollar's level.
There was an interesting note by Cullen Roche in Seeking Alpha today:
"The four best currency themes for 2011 via Saxo Bank:
- Long
GBP/AUD – the market positioning at the end of 2011 suggests
that the UK’s prospects are in the dumps where the belief for Down
Under seems to be that trees can grow into the sky. This trade is a way
to express the belief that the UK is at the vanguard in addressing its
fiscal challenges and could see a better than expected trajectory in
the new year while the AUD is at nosebleed levels and too dependent on a
mining sector that could falter in 2011."
Because of the wide spreads in the GBP/AUD, and, after the recent 1000 plus pip run up in this pair, we are going to take a pass on this trade at this time. Instead take a look at the AUD/CAD currently trading about 98.50. This looks like an interesting short on a return above the 99 handle. It might be a good longer term position, but you have to be careful because the overnight swap fees can become pricey.
Author: Ralph Shell - ForexRazor Analyst - Graduated from a small Ohio liberal arts college. Graduate studies in economics and history at Duke University. Ten years experience trading cash commodities in domestic and export markets. Former commodity analyst with Merrill Lynch in Chicago. Member of and floor trader at the Chicago Board of Trade for 18 years.