The Aussie Crumbles in Carry Trade Liquidation

The Australian markets crumbled under the panic in the global markets. Both yields and the stock market declined as investors switched from equities to fixed income. The massive carry trade liquidation resulted in huge reversals in the AUDUSD and AUDJPY. However, the Australian economy remains strong and as analysts pointed out no catastrophes or sharp reversals in fundamentals happened in the past two days. Hence, if the market stabilizes, they are looking for the Aussie to pick up.


[B]Stocks plunge on US credit fears[/B] - The fall of the Dow has resulted in a steep decline of the ASX index, which percentage wise exceeded that of the US equities. However, Austock Securities senior client adviser Michael Heffernan said that the ASX should rebound as the Australian economy is in good shape. He believes that this might be a necessary correction, as the markets cannot go up all the time. There is no reason to panic after a 2% drop of the US market as history had instances of drops as large as 20%. Source: The Australian,25197,22143358-643,00.html
[B]Shell reports big find in Australia[/B] - An oil giant Royal Dutch Shell overnight said that it made significant discoveries in Australia and Malaysia in the first half of this year. The company discovered large gas deposits off of Australia?s northwest coast. The company did not specify any estimates, but it believes that this will be an important resource for it in the future. The demand for gas in Australia remains high with country possibly looking to import this fuel as its deposits are running low. Source: Herald Sun,21985,22143008-5012062,00.html
[B]BHP raps regulators[/B] - BHP Billiton?s iron ore business development chief Peter Monkhouse claims that BHP?s three year battle with regulators to open rail lines to its Pilbara mine has cost the company $100 million in lost export sales. His prepared speech is set to attack the competition regulators for causing expensive delays to new investment in infrastructure. BHP, with Rio Tinto?s support, is battling with legal and regulatory decisions, which currently uphold the rights of Fortescue Metals Group operating in Pilbara to gain access to BHP?s rail network. Source: The Australian,25197,22140610-5005200,00.html

The Aussie has seen a huge reversal today, losing all the value it has acquired against the US dollar over the month of July. The analysts name the carry trade liquidation the reason for such huge drop. As the ASX fell 2.81% surpassing the losses of the Dow despite the apparent strength of the Australian economy led to massive risk aversion and carry trade liquidation. The Aussie lost 500 pips against the yen in the last 24 hours, going down to the level that it has been in the beginning of June. The Australian media did not put 90 cents for the Aussie on the headlines, but remained confident that RBA will hike quarter point in August. The market will be certainly relying on stability and performance of capital markets in the next few weeks.

[B][U]Stock Market[/U][/B]
The ASX collapsed today after the large Dow drop and the carry trade liquidation that followed. The fall of commodities did not help either, taking the mining giants down, BHP moving the index most with its massive 3.6% slide. Large banks followed the miners, with National Australia Bank Limited and Commonwealth Bank of Australia losing 3.4% and 2.2% of their equity value respectively. The index lost 175.6 points on the close at 6082.9.

[B][U]Bond Market[/U][/B]
The bond yield fell sharply today, coming under 6% for the first time since May. The rate was at 6.25% since November 2006 and the bond yield dropped to as low as 5.6% since the hike. The survey of economists still shows a strong consensus that a rate hike will take place in August. The yield dropped 17 bps to 5.97%.