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I am short the AUD (Australian Dollar) I am initiating a short position on the Australian Dollar against the US Dollar (i.e. US Dollar long, AUD short) based on what I believe will be a very nice short term trade. The US Dollar has taken a beating as of late due to all of the hype surrounding the Fed's next program of quantitative easing. That beating, while perhaps deserved, does not warrant a 1.05+ print on the AUD vis-a-vis the US Dollar (in my humble opinion). There are a number of headwinds for the Australian economy that are simply being ignored at this time, and as these issues begin to come to light, I believe the AUD will be knocked down a few notches. 

The short-term trade is the tail whip effect on Australia's economy due to China's slowing. The economy Down Under is largely dependent on commodities, and has fared well in light of China's economic boom and insatiable appetite for commodities. What will be the effect when this slows, as it is doing now? 

The longer-term trade is the eventual popping of Australia's housing bubble. They, like us, have had homes driven up to incredibly overpriced levels. They, unlike us, have not yet seen this bubble pop. Since we know how that story ends, it gives us a great opportunity to profit from that pending collapse. The AUD is one of the most turbo-charged, leveraged ways to profit from that potential downturn. As housing collapses, the Reserve Bank of Australian (their equivalent to our Federal Reserve) will likely be driven to reduce rates and pursue quantitative easing to help soften the blow. When this occurs, especially if it is coupled with an accelerating downturn in China we will watch the AUD trade below parity with the US Dollar.

The risks to this trade are a more resilient China and Australia experiencing the first ever unpoppable housing bubble. While the latter risk seems unrealistic, it could take longer than expected for this bubble to pop (ask Australian economist Steve Keen) and the carry on this trade can be quite expensive.

Trade specifics: I am initiating a short trade north of 1.055 on the AUDUSD trading pair. I am looking for their central bank to ease in the next few months due to the slowdown in China. I will reassess the trade when and if there is a major move up or down. If it remains flat, I will remain in the trade and patiently wait for my thesis to be tried.

As always, be careful when trading currencies! There is a tremendous amount of leverage and risk. Forex and currency trading should not be implemented without extensive training and risk mitigation.
Written By: Joshua Ungerecht

AUD, Australia, central bank, China, commodities, Currencies, Currency Trading, Fed, Federal Reserve, Forex Trading, Housing, Housing Bubble, QE3, Quantitative Easing, Real Estate, Reserve Bank of Australia, US Dollar