Share markets mostly pulled back over the last week as worries about the US Federal Reserve (Fed), talk of tougher capital requirements for US banks and new trade sanctions over the Ukraine weighed. Japanese shares were an exception globally with the fall in the yen to a six-year low boosting confidence. US shares fell 1.1%, Eurozone shares fell 1.2%, Chinese shares rose 0.2% and Japanese shares rose 1.8%. Australian shares fell 1.2% on the back of the weak US lead and the ongoing fall in the iron ore price. Bond yields rose though on the back of Fed concerns and commodities were soft not helped by a stronger US dollar.
After being wrong on the Australian dollar all year (I expected it to fall, but it went up), it’s now going in the right direction again thanks to a combination of a resurgent US dollar as the Fed edges closer to an eventual rate hike and continuing weakness in commodity prices as highlighted by the plunging iron ore price. This is being reinforced as the Australian dollar has broken through technical support including its 200-day moving average. The unwinding of net long speculative positions in the Australian dollar is likely to add to its downwards momentum. My view remains that it’s on its way ultimately to around US$0.80 or even a bit below which is a level that would neutralise the relatively high cost and price base in Australia compared to the US. The resumption of the downtrend in the Australian dollar may not be so good for us as consumers (as import prices will have another leg up), but it will provide a great shot in the arm for trade exposed industries, such as manufacturers, tourist operators and higher education institutions, which is just what the economy needs. For investors, it means having a greater exposure to foreign currencies (notably the US dollar) via e.g. unhedged global shares or short Australian dollar positions (which we have done in our funds).
Please click here to read the full article: Weekly Report ~ 12 September 2014