Market Anthropology: Broke-Down-Under

Tuesday, October 16, 2012


Although I normally find it to be bad form to single out an analyst or firm regarding a questionable market call, I couldn’t help but raise an eyebrow when I read the remarks out of PIMCO yesterday regarding the Australian dollar:
“We think those structural flows which have brought foreign holdings to such high levels are going to persist,” said Mr. Mather, adding that Pimco prefers five year and ten year Australian bonds.

That demand means the Aussie dollar has taken on the status of a new safe haven currency given the country’s robust balance sheet with net debt to peak around 10% of gross domestic product.

“It does deserve that safe haven status,” said Mr. Mather of the Australian dollar. “It’s like a new regime, it used to be a proxy for risk, everybody in the world jumped on to try and short the Australian dollar.

That correlation has broken down and with good reason,” he said. WSJ 10/16/12

Ignoring both Australia and China’s deteriorating fundamental backdrops,  I just don’t see the evidence in the charts that the dynamic has changed regarding the Aussie and its utility as a proxy for risk. Frankly, most times I hear that a “correlation has broken down”, shortly thereafter – the divergence is resolved and the correlation reestablished.