When bullish but prudent investors in Chinese shares wished to hedge their long positions this past spring, one popular way to do so in a market that made direct shorts difficult was to take bearish bets on Australia, which was one of the main beneficiaries of the boom in China. Now that the Chinese market has reversed course big time, shorting the Aussie dollar makes even more sense. Over the past year, the Aussie has fallen from more than US$0.90 to less than US$0.70, and probably still has further to fall.
No matter how hard the landing in China, the fall will be even harder for those like Australia that prospered from the commodities boom. That has been true for a while and will be driven home even harder in the wake of the drop.
Trades that worked well in the past as a hedge on a growing China, on a surge in China shares pushed by complacent investors, and on an overconfident government, work even better as the country slows. These trades include negative positions on copper, iron ore or commodities indices, and shorts on the currencies of those that, like Australia, sold raw materials to China, or those, such as the Koreans and Taiwanese, who sell semi-processed goods to the mainland and are therefore also in for tougher times.