FX COLUMN-Horse trading may give the Aussie a lift

Wed Jan 22, 2014 8:27am EST

Related Topics

- Neal Kimberley is an FX market analyst for Reuters. The opinions expressed are his own -

By Neal Kimberley

LONDON, Jan 22 (Reuters) - The start of the Chinese Lunar New Year on Jan. 31 may give the Australian dollar a lift if Chinese investors choose to celebrate the Year of the Horse by piling into a currency arguably ripe for a rebound.

While such a notion may prompt hoots of derision from traders in the western hemisphere, the differing qualities of the 12 years in the Chinese cycle are closely studied by potential investors in Asia - and this horse has form.

In the Chinese zodiac, the horse, noted for its strength, lends positive characteristics to the year ahead and may well elicit a confident approach by Chinese investors across the world.

Given the rise of China's economic clout, it would be absurd not to at least consider the possible impact.

In currency terms, the Australian dollar, often seen as a proxy for a bet on Chinese economic growth since China is the main market for Australia's commodity exports, would likely be the beneficiary.

The fact that the market seems well short of the Aussie, down some 1 percent against the U.S. dollar this year before an unexpectedly sharp rise in inflation data on Wednesday, argues for the possibility of a rebound.

Friday's data from the U.S. Commodity Futures Trading Commission supports that view, indicating a continuing and material short Aussie/long greenback position.

In recent years, what has proven good for China has often fed back into heightened investor demand for the Aussie dollar.

And a glance back to 2002, the last Year of the Horse, may have investors saddling up.

Chinese New Year in 2002 fell on Feb. 12, and the Australian dollar closed that day at $0.5089, rising to $0.5264 on March 7, a 3.4 percent rise.

Logically it would be reasonable to expect Chinese investor confidence showing itself first in the domestic market before spilling over into a foreign currency, like the Aussie, and the data is supportive in 2002.

Tracking the Shanghai stock market over that period shows investors piling into equities as the New Lunar Year began.

The Shanghai Composite Stock Index closed at 1,506.615 on Feb. 8, 2002, its last trading day before the Lunar New Year holiday began, moving up to 1,613 on March 7, for a very tasty 7 percent increase.

Of course, 2002 is not 2014, and a further fall in the value of the Aussie dollar to 85 cents is arguably justified on economic fundamentals, but currencies do not always move in straight lines.

And while there are sound economic reasons why stock markets and indeed the Aussie dollar rallied in February 2002, the fact that they did rally will merely reinforce the belief in the Horse effect for those who already give it credence.

With the market short of the Aussie, the currency may be vulnerable to a correction higher, perhaps back to the 90.5 cents level seen last on Jan. 14, if the year sets off at a gallop.

FILED UNDER:
A couple walks along the rough surf during sunset at Oahu's North Shore, December 26, 2013. REUTERS/Kevin Lamarque

Find your dream retirement town

Florida? Hawaii? Reuters has teamed up with Zillow to give you the power to customize a list of your best places to retire.  Video | Full Article