What Now for the AUD?

Last night, the Reserve Bank of Australia left interest rates unchanged at 4.75 percent. Many investors were looking for hawkish comments from the central bank but as suspected, the RBA failed to deliver. Given the recent deterioration in economic data (that we showed in our Australian Data Table), I was a bit surprised by the market’s lofty expectations. Of the 28 economists surveyed by Bloomberg, 5 even expected a rate hike! However the RBA proved to not be as carelessly hawkish as I had feared by maintaining a neutral to slightly optimistic tone. Much of the RBA statement remained unchanged from the previous month which suggests that the central bank has not grown any more hawkish or dovish. As a result, investors sold the Australian dollar, making it the only high yielding currency to NOT appreciate against the greenback today.

However just because the RBA opted for a more neutral stance does not mean that the rally in the AUD/USD is over. Based upon the central bank’s positive comments on growth, terms of trade, private investment and national income, interest rates could still be increased before the end of the year. The RBA is just waiting for commodity prices to resume its rise or the U.S. and China to experience stronger growth. As a result, the Australian dollar should continue to outperform the greenback. Even if the RBA maintains its current stance for the rest of the year, the AUD/USD could still trend higher simply on the easy monetary policy in the U.S.

Technically, the following chart shows that the AUD/USD is prime for a breakout. If the currency pair breaches 1.08, it should be clear sailing towards 1.10.

6 Comments

  1. Exactly. Aud (along with Chf and CNY) is funamentally the best currency around and with a strong yield. USD is the worst currency around, without yield. Peso, TRY, RUB – anything is safer today than the ‘reserve’ currency. Risk is shifting from the developped indebted nations and the process cannot be stopped through rates hikes. Disclosure of my positions : long AUD/USD, GBP/USD, CHF/USD, AUD/JPY.

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  2. The great thing about AUD is its exposure to China. The bad thing about AUD is its exposure to China. When China has a bust cycle, the collapse of AUD will be of epic proportion. I am from Hong Kong and there has been a marked mood shift for the worse among my peer group (highly educated professional twenty-somethings). They are the canary in the coal mine. AUD = risk of huge collateral damage. I know not when but it will happen some day. You speak of yield, but CHF with no yield has outperformed the high yielding AUD. Similar with gold. Things to make you go hmm.

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  3. @Jade thats the beauty of trading. You may be bearish and short. We may both not be right but make money nevertheless because Forex is about jigsaw up and down – tp is good, slbe a disaster. Gold is outperforming all currencies beacuse all currencies are being destroyed thanks to the FED. CHF used to be backed by gold untill not so long ago…

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  4. @Marcin Actually I am not short AUD, I am just pointing out the risk of AUD crashing when China takes a fall. These events are about as inevitable as a Greek default. In all cases we just know not when. Gold is considerably down this year in CHF terms. Gold is less safe because it gets liquidated when hedge funds or others must raise cash in a hurry like during a crisis.

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  5. @Jade, today’s China news better than expected and far from any hint about the fall of China. I need tangible reason to be affraid and to close positions, especially that the interest from my Aud positions pay my rent:)

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  6. Marcin, I didn’t say China would catch cold now! Actually I’ve long been on the record elsewhere opposing assertions that China would experience any hard landing this year. As for China’s data yesterday, most of it is as bogus as as bernanke buck. High returns entail high risk. For years Icelandic positions paid rich interest too and were rated investment grade before crashing to zero due to the US-induced banking crisis. Similarly, some day China will take Aud investments down too. Not that you should believe what someone says on the internet. Good luck.

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