This is probably going to go down in Foreign Exchange history as one of the dumbest trades ever

Australian Dollar Outlook

We were wondering about the bizarre behavior of the Australian Dollar exchange rate on some days in recent weeks.

Now we may have an explanation.

According to the WSJ, Citic Pacific, the bluest of the blue-chip Chinese companies in Hong Kong (called, naturally, a red chip), could lose HK$15.5 billion (US $2 billion), and possibly more, because of leveraged positions on the Australian dollar. Citic has a big investment in an Australian mining company.

The WSJ says “the mining investment requires the company to buy equipment and supplies in Australian dollars. It isn't unusual for companies to hedge their foreign currency exposure. But Citic Pacific did something more: It turned to structured products dubbed "accumulators" that obligated it to buy a specified amount of Australian dollars"

In this case, about nine billion Australian dollars (US$6.1 billion at current exchange rates), at a fixed price.

“The Australian dollar's sharp downturn in recent months, a side effect of the global credit crunch, has left Citic badly exposed. Already, the bets have cost the company HK$807.7 million in realized losses and would cost it HK$14.5 billion more if they were marked to market at current values. Because Citic Pacific retains open positions, the losses could deepen if the Australian dollar continues to slide against the U.S. dollar.”

Bloomberg says CITIC stock fell 66% since the disclosure on Oct 20. It has “four times more money riding on the Australian dollar than it earned last year… [with a commitment] to buy as much as A$9.44 billion … at an average price of 87 U.S. cents. The currency traded at 66.72 cents as of 7:54 p.m. in Sydney” today. This is probably going to go down in Foreign Exchange history as one of the dumbest trades ever, along with VW and Bank Negara from the 1980’s.

Pounds to Australian Dollar exchange rate is currently 2.4473 and i you need to Buy Australian Dollars a good level at present is 2.4800 if you can get it

Buy for Now

Barbara Rockefeller
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