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I have been VERY bullish the Australian dollar over the past month. When I was in Asia, I appeared on CNBC twice to talk about how the AUD/USD was poised for further gains (CNBC Interview 1, CNBC Interview 2). At that time, the AUD/USD was trading at 71 cents. Now that the pair has exploded, the opportunities are starting to become a bit more limited. I still think that the AUD/USD is headed to 78 and possibly 80 cents, but Monday’s high of 7715 could prove to be tough resistance.
Australia stands to benefit from both a U.S. and Chinese recovery. The Chinese government has previously said they are looking to increase their investments abroad and Australian commodities have long been an attractive investment for the Chinese. A growing nation has growing resource needs and the previous decline in commodity prices has encouraged China to add to their stockpiles at current levels. Australia is a big copper producer and Chinese demand for copper should remain strong thanks to their stimulus spending. Last month, the Australian labor market reported positive job growth which confirms my overall belief that when the dust settles, Australia will be first to rise from the ashes. Yes, the budget deficit is expected to hit record levels, but that is a problem that plagues all major economies.
With that in mind, I have my eye on EUR/AUD. This pair has a higher spread and is more volatile, but there is scope for a move down to 1.75. I’ve been bearish this pair since 1.85, and now the 1.80 level will serve as resistance.