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Aussie dollar set to decline whether Soros is short or not

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It's difficult to tell which came first, Monday's one per cent sell-off in the Australian dollar or the rumours that fabled hedge fund manager George Soros had built a $1-billion Australian ($1.03-billion) short position. Either way, the Australian currency seems set to fall against its less resource-intensive global counterparts.

The Sydney Morning Herald reported rumours Monday that George Soros – fresh from a lucrative long gold trade and well-timed sell – was shorting Australia's currency. The report also indicated, however, that the rumoured size of the position, at $1-billion, was not large enough to move markets on its own even if placed all at once (which it likely wasn't).

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Whether Soros is short or not, there has been an increasingly loud chorus of strategists predicting a sharp decline of the Aussie dollar. Credit Suisse global strategist Andrew Garthwaite was definitive as early as July 2012: "AUS$ and Australia appear clear-cut shorts to us," he wrote.

The Australian economy's dependence on mining, and by extension Chinese demand, is the main issue. Mr. Garthwaite notes that mining investment contributed 65 per cent of the country's GDP growth in 2012. But this year, "projects under consideration have been cut by around 30 per cent and tend to lead mining [capital expenditures] by 12 to 18 months."

This chart shows the Australian dollar's suspicious ability to levitate despite sharp declines in Chinese iron ore prices – Australian miners account for 34 per cent of the global iron ore industry. Metallurgical coal, where the country controls 58 per cent of global supply, is another industry enduring weaker prices as the Chinese look to curb excess steel production.

Australian exports to China are likely to slow even if China can maintain its current pace of economic growth. It's difficult to see the steel industry – which generates both iron ore and met coal demand – expanding much further when the supply already exceeds demand. As a result, Australia's growth is likely to slow, putting the country's currency under pressure.

Scott Barlow is a contributor to ROB Insight, the business commentary service available to Globe Unlimited subscribers. Click here to read more of his Insights , and follow Scott on Twitter at @SBarlow_ROB.

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About the Author
Market Strategist

Scott Barlow is The Globe's in-house market strategist. He is a 20-year veteran of Canadian investment banks, including Merrill Lynch Canada, CIBC Wood Gundy and Macquarie Private Wealth (MPW). He was a highly ranked mutual fund analyst for 10 years and then, most recently, the head of a financial adviser support team at MPW. More

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