May 25, 2010 – Take a Second Visit to the Trough on the Australian Dollar

Featured Trades: (FXA), (EWA), (AUSSIE/EURO CROSS)


1) Take a Second Visit to the Trough on the Australian Dollar. Many readers made a killing last February when I recommended that they buy Australian dollars and short the euro and the yen against it (click here for the call). The outright Aussie/US Dollar (FXA) jumped from $AUS.85 to $AUS.92, while the cross soared from AUS$.63 to AUS$.72, which, if you used the 5:1 leveraged on the futures I suggested, brought in a 71% return. Since then, the lucky country has become accident prone, shooting itself in the foot with both barrels of a side by side shotgun, and I hope you all kept your trailing stops in place. A lot of the hottest hedge fund money poured into The Land Down Under, and when the global risk reversal came (click here for that call), the baby got through out with the bathwater. Then, the Australian government announced a 40% special tax on the profits of mining companies to fund anticipated social service costs down the road. The blow was serious enough to torpedo Peabody Energy's (BTU) $3.5 billion takeover of McArthur Coal (MCC.AX), and several other major foreign investments have been put on hold. I still think Australia is blessed, with that perfect combination of huge resource and energy exports, a strong economy, rising interest rates, and a small population to support. So, you should start scaling back into the Ausie dollar around AUS$.80, the Aussie/euro cross at AUS$.65. And when you want to go back into equities, Australian stocks (EWA), which have lost a mind blowing 25% in the past month, should be at the top of your list too.

Australian Dollar/Euro Index

Australian iShares

Currency Shares Australian Dollar Trust

Australia2-2.jpg picture by madhedge

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