Why sterling could conquer the Aussie dollar in 2011

Aussie cricket fans are in mourning as England delivered a sound thrashing in the recent Ashes series. And the bad news doesn’t end there for Australia – this may not be a great year for the Aussie dollar either.

After a strong 2010 the Aussie dollar has fallen for four straight days. And there are several good reasons to expect this trend to continue.

First off, recent housing and manufacturing data have been weak. After a blistering year last year when its property market lead most of the rest of the world, interest rate rises are expected to take the heat out of Aussie homes.

Meanwhile as Bloomberg reports manufacturing activity contracted for a fourth month in a row in December as those same rate rises started to bite into consumer spending. The first Ashes loss on home soil since 1986/7 is hardly likely to cheer up the average Aussie and send them out spending either.

Then there’s the faltering commodities story. Australia is a commodity exporter, and recent floods have disrupted shipments for cotton, fruit and coking coal. All three are big business (think two-thirds of world production in the case of coking coal) in the worst affected state – Queensland.

More importantly, one of the world’s biggest buyers – China – is showing signs of slowing down its demand. Interest rates have been rising there too as Beijing tries to reign in an economy growing at close to 10% annually. Lower demand from China (which has bought up entire “copper mountains” in the recent past) is more bad news for Australia.

So although, in a somewhat eye-popping report, the Centre for Economics and Business Research may be forecasting that, based on increased urbanisation, the Australian economy will overtake the UK’s in the next two decades, for early 2011, it might make more sense to watch for opportunities to bet against the Aussie dollar, and perhaps the mining sector.

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