Aussie Dollar Getting Long In The Tooth?

Conclusion: We remain bearish on the Aussie dollar for the intermediate-term TREND and forsee a correction from its near all-time high (AUDUSD), primarily due to slowing economic growth down under in part aided by slowing growth in key export markets, which may lead to lower interest rates and more accommodative monetary policy.


Position: Bearish on the Australian Dollar over the intermediate-term TREND; Bullish over the long-term TAIL.


In screening for and analyzing foreign exchange opportunities, we focus primarily on a three-factor model, which incorporates real GDP growth, inflation, and the a combination of monetary and fiscal policy.  Using this framework, our objective is to absorb any/all relevant data points that could help point us to the correct slopes of these factors, especially versus the perceived slopes embedded in consensus expectations.


On the margin, the factors supporting the Aussie dollar’s +28% rise since when we first turned bullish on it in June of 2009 are deteriorating and look to worsen over the intermediate term. While we remain bullish on the AUD over the long term (especially against the USD and JPY), we do think we’re setup to see some near-term weakness in the currency and are inclined to short what we feel is the start of what may be a meaningful correction, a position we introduced in mid-March (email us if you need a copy of the report).


Below we analyze all three of the driving factors individually in support of our recent call for the AUD to correct over the immediate-to-intermediate term.



We think the near-term growth data points in Australia are setup to rollover in advance of what should be a sequential deceleration when 1Q11 Real GDP is reported. This may seem contrary to our current positioning, as we are currently long Chinese equities in the Hedgeye Virtual Portfolio, but we are keen to point out the duration mismatch between the Chinese equity market(s) signaling a bottoming in China’s growth rate and Australian economic data slowing as China bottoms.


Comparing 4Q10 vs. 1Q11 on various metrics of economic data do indeed support our view that 1Q11 GDP growth will slow sequentially from 4Q10 with upside/downside risk in 2Q11 is skewed to the downside (Japan is Australia’s second largest export market at 19.2%; China is first at 21.8%). Of course, Australia’s economic growth will eventually rebound alongside China and Japan’s but near term, growth looks to poised to slow.


With the notable exception of Retail Sales , Private Sector Credit growth, and Business Confidence, Australia’s economic data has largely being trending in the wrong direction, particularly when analyzed on a quarter vs. quarter basis:


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Our forecast for the slope of inflation in Australia is largely a wash. Yesterday we saw the TD Securities Inflation Index accelerate to +3.8% YoY in March, driven in part by higher crude oil prices. Still, on a quarterly basis, official reported inflation looks to continue its deceleration in 1Q11 based on the trajectory of this unofficial gauge. The current strength of the currency is also a supporting factor for a deceleration in Australian CPI and as RBA Governor Glenn Stevens recently said, “The central bank’s goal is being assisted by the high level of the exchange rate.”


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Where Australian inflation data heads in 2Q11 will be largely based on crude oil prices and the resiliency of the Australian consumer, which is currently growing less resilient on the margin, based on consumer confidence readings, and that trend looks to continue over the intermediate term as lagging 1Q growth data weighs on hiring. On the flip side, we maintain our bullish intermediate-term position on crude oil prices, so Australian inflation looks like a wash at this point/we need more data to confirm a view in either direction.


Given this mixed outlook for inflation, we can be reasonably assured that the RBA will continue their hold on interest rates over the intermediate term, as the proactive Glenn Stevens has a history of being data dependent. And with growth data expected to look sour in the near-to-intermediate term, we wouldn’t be surprised if Stevens elects to cut rates. Australia is one of the few developed economies in the world that has headroom in this direction, so Australia remains home to one of our favorite equity markets, particularly in a softer policy setting. The current quantitative setup in the All Ordinaries Index supports this view.


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Monetary & Fiscal Policy

As mentioned before, Glenn Stevens and the RBA have been incredibly proactive in addressing the current global surge in inflation – perhaps more so than any other central bank in recent years. As a result of their prudence, they’ve been able to wait and watch economic trends develop since their last hike in early November, rather than playing a dangerous game of “policy catch-up” like we’ve seen in India, for example.


As it relates to the slope of future monetary policy, we continue to believe that the RBA will minimally remain on pause over the intermediate-term and could potentially cut rates if 1H11 Real GDP growth comes in where we expected it to back in early December (email us for a copy of the report). In fact, Stevens called the 4.75% target cash rate “mildly restrictive” and “appropriate given the economy’s outlook”; we contend “mildly restrictive” could turn into “very restrictive” in a heartbeat – particularly if you use Hedgeye estimates for the slope of Australian growth.


While both the buy-side and sell-side are starting to sniff this out, the major risk to the Aussie dollar is that, potentially, neither side is bearish enough on Australian interest rates.


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The Australian bond market, however, does appear to be bearish enough on Australian interest rates. Since rallying from putting on an impressive rally from the August 2010 lows, Australian 2Y and 10Y sovereign yields appear to have hit an invisible ceiling, falling (-27bps) and (-4bps) YTD, respectively. For normalization purposes, that equates to declines of (-5.3%) and (-0.8%), respectively.


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This bullish bid for Aussie bonds is weighing on Australian swap rates – particularly at the short end of the curve. As such, the compressing interest rate differentials relative to the USD, JPY, and EUR are setup to weigh on the currency going forward.


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Shifting gears to fiscal policy, we continue to favor the hawkish direction of Australian fiscal policy (a key reason we are bullish on the AUD for the long term), as it continues to distance itself from the egregious laxity showcased here in America.


Rather than use the recent flooding and cyclone as an excuse to allow government finances to deteriorate, Prime Minister Julia Gillard maintained her pledge to return the government budget to a surplus by 2013. To fund the rebuilding, her government announced spending cuts and a one-time levy designed to collect at least A$5.6B, though that tax may have to be revised upward in the coming weeks as official estimates for the damage have been revised up recently to A$9.4B.


All told, we remain bearish on the Aussie dollar for the intermediate-term TREND and expect a correction from its near all-time high (AUDUSD), primarily due to slowing domestic growth in part aided by slowing growth in key export markets, which is likely to continue to weigh on Aussie interest rates.


Longer term, however, we remain bullish on the currency due to its sober and proactive monetary and fiscal policy, in addition to its positive exposure to China and commodity prices – which are likely to remain elevated much longer than consensus thinks, based on the findings of empirical studies which suggest commodity inflation is a leading indicator for the sovereign debt default cycle.


Darius Dale



Corn is the big standout week over week, trading at $7.66 per bushel yesterday.


Corn has been trading softly over the past few weeks but moved up 14.1% in the last week to bring the item to +122% YoY.  Regarding proteins, this is certainly a meaningful move that will likely support meat prices going forward.  For a number of weeks now the commodities we monitor have been mixed in terms of the direction of the weekly price action.  While corn and wheat have gained strongly (14% and 7%) on the last week, dairy costs have decreased by similar respective magnitudes. 


In this note, I'm raising the red flag on the chicken producers, SAFM, TSN and PPC due to the surge in corn prices.  As you can see from the table below the surge in corn is happening at the same time chicken prices are getting weaker.  




As the chart below shows, corn prices have bounced sharply following a brief decline in the second half of March.  An increase in global demand is expected to provide sustained support for corn prices.  For restaurant companies with a high level of exposure to protein costs, increasing corn prices are a concern.  Below is some commentary from management teams on corn prices.


CMG, 4Q10 Earnings Transcript, 2/10/11:

“Though we have contracted for most of our corn for our salsa for the year, reports of continuing or even worsening supply shortages of corn will only add to inflationary pressure on the meats that we serve.”


JACK, 1Q11 Earnings Transcript, 2/24/11:

“There are some Act of God provisions that will get us north of our contract bands, but at a reduced rate from what the current market pricing is ... And then also grain, corn, wheat and soybean impact, and there are input costs for a number of the proteins. And that's really what's driving up beef at this point.”


SAFM, J.P. Morgan Insurance Conference, 3/30/11:

“Corn and soybean mill prices remain significantly higher than historical average and we think there are going to be instances and times up from now through the growing season that they could spike higher.”


“The year 2006 was the year of avian influenza and 2008 was $8 corn and the collapse of our export market in the fall. That – 2010 – 2011 will be another year like 2008 right now.”




Wheat prices are also rising with corn and this is, as with corn, largely attributable to global demand.  Corn and wheat prices in Asia are likely to continue to rise for the next number of weeks due to tight supplies in exporting countries.  Wheat crop conditions in the U.S. are also a concern.  Interestingly, the surge in corn prices is also pushing wheat higher as the corn surge spurs a livestock-feed swap.




Chicken wing prices continue to decline.  While this is helpful for BWLD margins, the NFL lockout hearing today is even more important.  Today, NFL players are asking a federal judge to grant an injunction preventing the NFL lockout and forcing the league to resume operations.  It seems more likely that the injunction will be granted with a stay than without but a denial of the injunction would put the NFL in the driver’s seat and the prospect of a NFL-less fall could become more real.  We know which side BWLD is cheering for!




Dairy costs have declined significantly over the past week and this is providing some relief for CAKE (which is not hedged on their dairy costs), DPZ and PZZA.  On a year-over-year basis, dairy prices are up but the step down over the past few weeks has been meaningful.






Howard Penney

Managing Director


The Macau Metro Monitor, April 6, 2011



 Taiwan's Ministry of Transportation and Communcations (MTC) unveiled its gaming bill recently.  Here are some details:

  • 2 gaming licenses with concession period of 30 yrs
  • Gaming tax: 12-15%
  • Residents subject to NT$2,000 entrance fee.
  • Additional NT$8 BN tax revenue / year

The bill will be discussed in many public hearings in Kinmen, Matsu, and Penghu during April and May.  It will undergo revisions before being submitted to Congress.  The media believes legislative review may happen by year-end.



MGM Hospitality, a subsidiary of MGM Resorts International, and Asian Coast Development (Canada) Limited, have named John Shigley as MGM Grand Ho Tram's President and COO.  Shigley has recently been supporting MGM Resorts International’s Asian gaming interests, primarily in Macau, while also serving as executive vice president of operations for MGM Grand Las Vegas.


According to a poll taken by the Association of Singapore Attractions (ASA), 45% of Singapore's attractions had seen a decline in visitation in 2010, despite a 20% rise in visitors to Singapore.  “Our inaugural survey revealed that while national tourist arrivals grew by one-fifth in 2010, its influence wasn’t evenly felt across Singapore attractions. We’ve also discovered that the IRs tend to benefit the attractions on Sentosa Island more so than any other location," said Kevin Cheong, Chairman of ASA.

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Notable news items and price action from the last twenty-four hours.

  • YUM down 1.8% on accelerating volume; China raising rates and rumors today that KFC in Japan to reduce outlet opening hours in response to shortages in chicken supplies.
  • RT to report AMC current guidance for fiscal 2011 (May) guidance is EPS $0.76-0.86 and company-owned same-restaurant flat to +2%.
  • LNY CEO and MSSR suitor Tilman Fertitta said in an interview with CNBC that McCormick & Schmick’s “is not a good public company” and Landry’s will make its official tender offer on April 7.  On the broader restaurant space, Mr. Fertitta discussed inflation as being a present factor for operators.
  • MSSR gained 4.8% on accelerating volume yesterday.  Tilman will end up paying $10.50-$11.00 for MSSR.
  • CMG CEO Steve Ells received $14.1M in compensation for fiscal 2010 versus $6.41M the year prior.
  • COSI gained 3.2% on accelerating volume during yesterday’s trading.
  • MCD may be facing another Happy Meal ban, this time in New York as politicians move to ban toy giveaways from fast-food restaurants.  City Council Deputy Majority Leader Leroy Comrie, who plans to introduce the bill on Wednesday, said banning toy giveaways would reduce the allure of fast-food restaurants for children and encourage the industry to provide healthier options.
  • Volume in restaurant stocks broadly fell yesterday, versus the thirty-day average.




Howard Penney

Managing Director

Patriot Pigs

“Lincoln’s ability to retain his emotional balance in such difficult situations was rooted in an acute self awareness.”

-Doris Kearns Goodwin, Team Of Rivals


I’m still grinding through this American classic, “Team of Rivals – The Political Genius of Abraham Lincoln.” The aforementioned quote from Kearns Goodwin comes from Chapter 23 which is titled, “There’s a Man In It”, which dissects the subtleties of leadership qualities that were uniquely possessed by both Lincoln and Ulysses S. Grant.


It’s an outstanding chapter in American history to reflect upon not only because of its constitutional gravity – “give me liberty or give me death” – but because it reminds us that this country is built on the backs of American character and resolve. What you are seeing from the said-leaders of US Government today looks nothing like it. These pretending patriots remind me more of pigs at a trough than Leaders At The Front.


If Timmy Geithner wants to go moral-compass on me for writing that, bring it. My definition of leadership on the ice, at my firm, and in the community is a heck of a lot different than his, and I’ll stand up and say that to his face. YouTube the man. Watch him mimic the hand gestures of Larry Summers. Geithner doesn’t have a sense of self awareness. He is a bureaucrat - not the leader America needs on the front lines of this US Debt-Ceiling Debate.


As we predicted, the US Government Shutdown and Debt-Ceiling Debate has replaced Japan and the Middle East as top headline news. This “news” is real-time – and the entire world is watching. If we think that we can call Europeans “pigs”, point fingers at other countries for The Bernank’s inflation, and come out of this generational debate about deficits and debts smelling like a rose, think again.


So let’s rethink…


One of Bloomberg’s top headlines this morning = “Geithner Says Failure To Raise Debt Limit Would Trigger a Financial Crisis.” And, expanding upon his leadership thoughts, this is what our squirrel hunting bureaucrat had to add to the global risk management conversation:


“You will shake the basic foundations of the entire global financial system… I’m totally confident that Congress will act to avoid that… It will be inconceivable that lawmakers will not act in time…”


Well Mr. Unaware, conceive reality – this government could (and should) shutdown. During both Bush and Obama’s administrations (you advised both), you worked tirelessly at putting America’s balance sheet in this position. Shame on you for reverting to your go-to move of fear-mongering so that we can do more of what got us into this colossal disaster of fiscal sense. Shame on you Geithner. Shame on you.


I’m neither a Republican nor a Democrat. So instead of looking for an angle on me Timmy, why don’t you take a good and hard long look at what Mr. Macro Market is telling you about your Patriot Pig commentary:

  1. Dollar DOWN: Trading down for the 11th out of the last 15 weeks (and down -15% since Geithner became the head of the US Government office that is supposed to be protecting it) the US Dollar Debauchery continues to stoke The Inflation to new economic-cycle and YTD highs (CRB Commodities Index, Food, and Oil both hitting fresh highs this morning).
  2. Euro UP: After registering its best quarterly performance versus the US Dollar since the Euro’s inception in 1999, it’s hitting new YTD highs at $1.43 this morning and smoking all Patriotic Pig name callers in the US out of their holes – reminding Americans that our fiscal issues are worse than Europe’s. And that’s saying something…
  3. Short Term US Treasuries DOWN: Not that the Secretary of the US Treasury should hold himself accountable to massive percentage moves in the prices of US Treasuries, but into and out of Geithner’s fear-mongering comments, 2-year UST yields are ripping higher (up +39% since March 21st, 2011) as  US government shutdown default premiums rise alongside inflation expectations.

Of course it takes two to tango in Burning The Buck  - both a fiscal and a monetary policy central planner. Tag, Bernank and Timmy, you’re it – and either your boss (who has read Lincoln quite closely from what I hear) has “an acute self awareness” of what the American people think about finding fiscal “change we can believe in”, or he doesn’t.


As for the rest of us, Yes We Can.


The most obvious way to make money on this in 2011 has been to be long of The Inflation Policy of the US Government (short the US Dollar, and short US Treasury Bonds). But, Dear Americans and Canadians alike, please don’t confuse our profits with patriotism. There are 44,000,000 Americans on food stamps (all-time high). While a small some of us are getting paid, most of us are getting plugged.


But be careful out there levered-long traders of the risk management gridiron - being long The Inflation Policy isn’t a new idea. Hedge Fund net long exposure to commodities recently backed off its YTD high, but that was an all-time high (which is saying something given how much our industry was chasing commodity inflation in 2007-2008 as The Bernank’s “shock and awe” interest rate cuts delivered us $150/oil). All-time, is a long time…


Interestingly, but not surprisingly, that inflationary period of 2007-2008 also gave birth to the first time that US Import Prices from China were UP on a year-over-year basis. That is, the first time until now – and Americans are going to take this in more places than the pump.


For these reasons, fully loaded with the long-term causality associated with creating them (burning our currency and credibility at the stake), Mr. Geithner it’s you who may very well “trigger a financial crisis.” And, perversely, most modern day politicians of the 112th Congress are longing for more of that.


My immediate-term support and resistance lines for oil are now $106.22 and $109.78, respectively. My immediate-term support and resistance lines for the SP500 are now 1322 and 1341, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


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