The currency hit list - The Australian Dollar (update 1)

The global ecomomy is becoming a basket case, the L shaped recovery, or economic drag on subpar growth will continue, at this point, indefinitely. The huge amount of stimulus and bailouts and monetary intervention by central banks has failed. Why? Well look at European and the interconnected banking sector that has linked it's self all to decayed assets via Europe's messy economies: the PIIGS. Forcing bonds yields up, CDS/LIBOR spreads to widen, it's either costing banks more to hold crap assets or destroying the value of assets. It summary the Euro zone is a massive risk contagion and stimulus/monetary efforts either exacerbated this or covered it up, now it's pay day. The European Central Bank under Jean-Claude Trichet have not only ran out of options (I guess they ECB could make a huge leveraged bet that Greece will return to profit via massive olive oil sales), but now hold billions of Euro's in unrealized losses as it tries to unclog the sentiment of fear in the European banking sector. But as Europe moves further into austerity, the slow down and the depreciated, or 'toxic assets will increase'. The Euro zone (unfortunately) is a write off.

So, Asia will be effected as a slowdown in the global economy takes place, if measured by GDP, a 'double dip recession' is a certainty. The problems in Asia is of course funding costs via banks and lenders, it must be made clear that although Asian banks may not have entangled themselves with complex derivatives, they are becoming more risk orientated as (particularly China, Taiwan, Hong Kong and South Korea) have allowed extra leverage into the economies with the consumer speculating heavily into property. If bank funding does blow out or a 'Lehman Brothers' incident occurs somewhere (we shouldn't rule out that fact that the commercial property markets have been quite but there are write-downs ahead); will send interbank funding spreads to 2008 levels .

Asian countries that have over leveraged particularly in housing are going to be very vulnerable to a global double dip recession. Australia (Asian region) is number 1 risk problem in that sense.

Politically, in a global sense, there are now the beginnings of 'fear and loathing'. In Australia the center left party (Labor) dismissed their leader (Australian prime minister at the time) in less than 24hrs. Kevin Rudd was not even voted out by the people, rather quickly removed from office (by his own party) and replaced . He (Rudd) is actually responsible for re-inflating the Australian housing market and skirting Australia from entering into a full blown recession/depression in 2008/2009. This was done by maintaining consumption via equity and wealth effect from housing. The Australian exports markets never really returned to 2007 levels (after 2008 Lehman collapse). The political dismissal centered around a paranoid delusive aspect of voter backlash from the goverments proposed 40% mining tax; this may have been a primer, but dissatisfaction runs deeper. As fears of Australia's vulnerability to falling Asian import markets (Australian raw material), goverment deficits, inflation and over leveraged housing may also been a unsettling dilemma for Australian voters. The point being is although the new prime minister Julia Gillard has now allowed miners a free ride by attaching the mining tax to the 10yr Aussie bond (it falls, so does the tax threshold). The big questions is when Australian begins to slow down, and this should be a rapid decent into the last 6mths of 2010. Will the new prime minster and her party initiate a 2nd round of stimulus? Since the budget deficit for Australia is 56+billion (for a population 21million - a tax receipt short fall from hell) if she does and sends the Australian deficit further into the red, no doubt the Aussie bond yields will go upward and bond vigilantes will start to look at Australia and price in higher yield offerings; thus effecting Australia's credit rating (such as the European PIIGS)

What is left is the high yielding Australian dollar, whilst we have deprecating currencies global, the AUD has been bought for it's high yield and desirability for Japanese carry traders. In 2008 I successful held a put on the AUD refer to AUD put 2010. It was my "go for the jugular" George Soros moment, admittedly the return was (very) micro compared to his "1billion dollars" in one day betting against the GBP ( UK pound) in 1992. Still in 2010 we have have a another 'jugular moment' brewing for the AUD as the Reserve Bank of Australia will start to cut rates in the next 6mths.

refer to chart AUD/USD:

the support (breach) is 0.80

a swing point (monthly chart) down at 0.87.