Home > Commodities and Rates, Getting Global, View From Up Top > Short AUDUSD – A Way To Play A Chinese Market Drop

Short AUDUSD – A Way To Play A Chinese Market Drop

I like this idea from three standpoints – Technical, Fundamental, and as a solid Risk/Reward trade. A way to play a short coming in the Chinese stock market is to short the Australian Dollar vs U.S. Dollar (AUDUSD). Australia's economic condition, without the help of China's insatiable appetite for commodities, wouldn't be in nearly as good a shape as it is. It has been the carry-trade de jour since the March 2009 bottom. With its huge interest rate differential vs. other major pairs and strong chinese fundamentals it has made a great deal of sense to own this currency.

But what if China is on the cusp of faltering? The Shanghai Index doesn't look so hot these days and in fact stopped participating in the global re-inflation trade back in August. An ominous topping triangle pattern has been in formation since and now looks to be breaking downward. Markets tend to lead economies and if this is the case then the Chinese economy could be on the brink of a cool-down. If that is the case then they will no longer be gobbling down commodities and therefore putting the brakes on the Australian exporting machine.

The interest rate differential will be something to contend with and in fact eat into profits a bit, but I think its still a good way to play a China breakdown.

Notice how closely the Shanghai and Aussie trade with one another. The actual correlation isn't what statiticians would call high, but it's pretty obvious using the eyeball test that these do in fact trade in proximity to one another. Eyeball test……fundamental connection……I'm satisfied its a good play. A new high, above 0.9387, would be the protective stop and a reasonable target of 0.8600 provides, if a trade is placed right now, an approximate 4 to 1 Risk/Reward opportunity exist……odds I'll take any day!

  Spx vs shanghai         Aud shanghai

 

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