Oz no longer great nor powerful

Sell the Australian dollar, Australian stock market?

Chart 1 below clearly the break in the 2-year uptrend in the Australian stock market since mid-May of this year. A simple reading of this chart would suggest that the former support level around 4,900, now decisively broken, becomes resistance for any rally to the upside. With the ASX/200 index currently trading at 4,834, this would suggest that there is certainly a lot of risk in holding Australian currency or shares right now.

Chart 1: Australian ASX/200 uptrend decisively broken

Source: Bigcharts.com

Chart 2: Australian dollar in downtrend against USD

Equally well, the strengthening trend of the Aussie dollar agains tthe US dollar has also reversed, with the Aussie dollar close to a 12-month low (Chart 2).

What fundamental reasons can we put this change of trend down to?

1. China - a slowing rate of growth points to slower growth in commodities demand from Australia, in both industrial metals and coal. 

It is hardly surprising to see that the European Basic Resources sector (miners with Australian assets such as BHP Billiton and Rio Tinto) has been the worst-performing sector in the year to date. Note that the lastest HSBC manufacturing Purchasing Managers Index was again below 50, indicating contraction rather than expansion in the Chinese manufacturing sector as of June. 

2. The Royal Bank of Australia is expected to cut interest rates in the near future to support the Australian economy; this however should lead to a weakening currency, other things being equal. 

3. Political landscape shifting, with Julia Gillard ousted as Prime Minister by Kevin Rudd, introducing an additional element of uncertainty and thus volatility. 

The noted macroeconomic strategy service The Bank Credit Analyst have come to a similar conclusion, given the increasing reliance of the Australian economy on mining exports (72% of total exports as of 2011/12). Australia-a-fading-star

Conclusion: In currency, prefer the USD, Euro or GBP to Australian dollar, at least until the Royal Bank of Australia cuts interest rates aggressively. In equities, the ASX/200 looks more likely to fall than rise from current levels, and looks set to continue to under-perform other developed stock markets. I continue to prefer the Japanese stock market given the growing evidence that Abenomics is having a positive effect finally on the Japanese economy.