Aussie Dollar In Trouble and the Effect of a Low AUD on the Aussie 200 Index

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1 Aussie Dollar in trouble How will the Aussie 200 handle a low AUD? Technical levels on the ASX200 This week…

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During this week's Invast Insights we cover: ► Aussie Dollar in trouble ► How will the Aussie 200 handle a low AUD? ► Technical levels on the ASX200 GRAB A 4 WEEK INVAST INSIGHTS FREE TRIAL (WEEKLY NEWSLETTER) http://invast.com.au/insights CONNECT WITH INVAST TODAY Facebook ► https://www.facebook.com/invastglobal Twitter ► http://twitter.com/InvastGlobal Linkedin ► http://www.linkedin.com/company/invast Invast ► http://www.invast.com.au Google+ ► https://plus.google.com/+InvastAu/

Transcript of Aussie Dollar In Trouble and the Effect of a Low AUD on the Aussie 200 Index

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• Aussie Dollar in trouble• How will the Aussie 200

handle a low AUD?• Technical levels on the

ASX200

This week…

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This week we look at the following topics:• Aussie Dollar in trouble• How will the Aussie 200 handle a low AUD?• Technical levels on the ASX200

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Over the past few weeks we have been looking at the performance of the top 30 stocks on the ASX200 index post reporting season and also last week a collection of smaller businesses which we watch very closely.

This week we will look at where we think the ASX200 index is heading over the next few months. Our discussion this week is shorter than usual because we are looking at one single instrument and the pricing of this in the near to medium term. Next week our focus is on how to build an investment portfolio based on the views expressed this week.

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Aussie market is in troubleThe Australian economy is heading for a very difficult period as commodity prices fall and the building and construction activity along the east coast of Australian starts to ramp up from depressed levels, albeit at a moderate pace probably not enough to cushion the blow from mining.

We continue to hold a bearish view on the Aussie dollar and think it’s going down to the mid 80 cent range against the US dollar over the next year or two. We have articulated these views on the Invast blog in recent weeks. As the Australian dollar falls, foreign investors will be looking to reweight their exposure to Australia, knowing very well the leverage Australia has to disappointing data which continues to come out of China.

We see the low 80s as a possibility and last week’s price action confirms to us the market’s fear that the Aussie rally is unsustainable.It’s worth pointing out that last week the Brent crude, copper and iron ore are all lower and the charts don’t look pretty. It’s not often that all these three commodities move in the same direction. When they do, we need to take action. The fact that they are falling suggests that demand out of China is probably a lot weaker than what some are expecting. This is extremely important for the Australian stock market.

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From an asset allocation perspective, we continue to see the need to have adequate levels of international exposure. The falling Aussie dollar provides an opportunity now to crystallise very high levels relative to other currencies. As the Aussie dollar falls, the value of international positions grows in local currency terms, all other things being equal. It has already fall by around 200 pips since we initially voiced our concerns on the Invast blog last week and more than 500 pips since our webinar in late June cautioning the fall in the Australian dollar.

In our July forecast guide special report, we wrote this about the Australian dollar.

“…We have made no secret of the fact that we feel the Aussie dollar is heading lower over the next year or so. The editor of this report, Peter Esho, outlined his reasons for this in a webinar held last month. The view there was that the Aussie dollar is probably going to find it difficult to break through the mid-90s against the US dollar and drift back somewhere near the mid 80 cent level…”

Looking elsewhere

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We were also bullish on the ASX200 index in that special report but we have since wound back our short term assumptions slightly. We are generally bullish on China for a while and we do very much believe in the medium-long term story here. The Chinese along with many of their neighbours have high living, wealth and lifestyle aspirations and these aspirations mean huge amounts of opportunity over the next few decades.

But we are also realistic enough to know that markets don’t always move in a straight line and perhaps some of these aspirations that we speak about have become unsustainable in the short term, because they have been fuelled by debt, in an unsustainable way. Please read the prior sentence carefully before taking judgment in our comments. What happens in 10 or 20 years is important, but what happens in the next one or two years is what impacts our trading and bank balance.

We read with interest that the central bank in Chile again cut interest rates last week and many economists see the rate continuing to fall over the next year. The most striking statistic in Chile was the fall in investment related to the mining sector – once a strong pillar of the Chilean economy. Investment in machinery and equipment tumbled 21% in the second quarter from a year earlier, after dropping 19% in the previous three months.

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Eventually the lower Aussie dollar (somewhere in the mid to low 80 US cent range) will start to provide an export boom in the Australian economy. This might occur in the next twelve to 18 months. At that point, we will be increasing our asset allocation to the domestic stock market. There will be more pain between now and then.

We think Australia remains a core, attractive investment market but one which will remain difficult for some time. Having the right asset allocation can make a large difference to the net returns in your portfolio.

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Image: AUS200 daily chart as quoted by Invast MT4 platform

Technical levels on the ASX200 index

In the short term we see some solid support at around the 5360 level but it will be difficult for the AUS200 index to break above 5510 unless we see a change in mood across China, or a large stimulus effort. Until then, the AUS200 is likely to remain in a narrow trading range, low interest rates in Australia provide some support for high dividend paying stocks which make up a large statistical proportion of the market.

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Next week we will walk through how to position an average portfolio for this reality and the proportion of allocation into Australia across a well-diversified portfolio of assets.

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Stocks outlook: Join the webinar to discuss these points

Invast Insights editor and contributing author Peter Esho will summarise the September outlook guide for the Australian stock market in this exclusive webinar. Esho is a regular contributor on CNBC, Bloomberg and host of ‘Your Money Your Call’. In his webinar he will outline:

Performance of key blue-chip companiesPerformance of emerging smaller companiesOutlook for the ASX200 indexPortfolio management tips and tricks

Peter’s webinar will cover both the fundamental and technical outlook going forward plus the key drivers to look out for and is expected to fill fast. Q&A will be open straight after the webinar. Register now by visiting CLICKING HERE.

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Go to www.invast.com.au/insights to get a complimentary 4 week trial and receive the latest insights as they are published to our live clients.

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