My inspiration for this week’s article is thanks to Jeremy Gratham’s April 2011 Letter which carried the title “Time to wake up: Days of abundant resources and falling prices are over forever.”
In the long term I usually expect mean reversion in just about everything and it’s a major consideration in all my fundamental analysis of stocks. However that key word “abundant” has got me questioning where the AUD/USD will settle in the long run.
Why does Gratham’s resource article have me thinking about FX? Well that’s because I see the US$/A$ trade as largely a commodity play. It’s almost a distant memory now but up until 2002 resource prices had been in a downward trend for 102 years (Oil was down to $16 a barrel in 1999). It’s impossible to know what fair value for oil, iron ore or any other commodity is, but with profit margins at extreme levels my bet is that capitalism will do its work and current prices are probably inflated. However, I’m guessing Gratham is also right and a Paradigm shift in the trend of commodity prices has occurred and this means on a long term average of more Aussie dollars required for each barrel or tonne forever!
In other words the Aussie dollar just underwent a paradigm shift as well!
Now I’m not saying the current FX in the “new normal” but rather that a new FX rate higher than the old long term rate may be in order. There ere are a couple of further comments I’d like to make. Firstly, China will hit a speed bump. When and how hard I don’t know but history always repeats itself even if it’s not from the same script. So watch out if you’ve positioned your FX trades long when that speed bump gets hit, I’d expect a nasty wack to commodity prices and likewise the Aussie dollar. Secondly, when that speed bump occurs there will most likely be superb buying opportunities to establish positions. Thirdly, watch Africa and Afghanistan. Yes they’re a mess but they’re resource rich and one day their mines will come on line. I’d hazard a guess that when those mines come on line commodity prices will be closer to there new long term trend and by that time the Aussie dollar will need to find itself closer to its new long term trend as well.
Happy trading.
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