What moves it?
The Australian Dollar is a "Commodity Currency" like the Canadian Dollar. Its fortunes are
heavily dependent on the prices of Gold, Copper, Nickel, Coal and Wool. Movements in the
Australian Dollar (Aussie) are also dependent on movements in the Japanese Yen, with the two
currencies tending to move in tandem. Generally, a stronger Yen has implied a stronger Aussie
and a weaker Yen has been followed by a weaker Aussie.
After hitting a bottom near 0.5650 in August last year, the Aussie rallied to 0.6750 in May this
year, based on a modest pickup in Commodity prices. But, lately, with Commodities falling again
the Aussie has been impacted negatively. The most worrying factor for Aussie is the price of
Gold which is trading at $ 265.50 an ounce, the lowest level it has seen in 20 years. As long
as the sentiment for Gold is bearish, the Australian Dollar is expected to be weak.
The current downmove to 0.6450 can be viewed as a normal retracement back to trendline channel
support area at 0.64, as seen in the graph above. Also, we can reason that the movement down
from 0.6750 was to be expected as the 0.6750 level was the 50% Fibonacci retracement level of
the BIG move down from 0.80 to 0.5650. As long as the currency is able to find a bottom at
0.6300, there is a good chance of it strengthening to 0.70 over the next 2-3 months. A fall
below 0.6300 ought to see a further fall to 0.60, however.
Inflation and US Dollar
The Australian Dollar will really benefit if the price of Gold picks up. And the price of Gold
could well pick up if the fears of Inflation in the USA suddenly intensify. There are, of
course, factors such as the rising Bond Yields, the fearful Dow Jones and slow movement out of
assets in cash holdings would imply that the strength of the US Dollar could be called into
question, at least temporarily. We also need to be mindful that the Forex market is again
thinking that the Yen could strengthen to 117.50.
Apart from Inflation, the factor that could support the Australian Dollar is the possibility
that with a recovery in Asia, which the USA is not averse to, commodity prices may find a base,
if not positively strengthen.
Buying the Australian Dollar near 0.6300 might be a low risk trade. As the Australian and US
Interest Rates are almost identical (6 months Libor being close to 5.18% p.a. in both), there is
no "cost of carry" involved in trading the Aussie against the US Dollar. Remember, however, that
we need to keep an eye on movements in Gold to able to trade this currency properly.
Read CURRENT Forecasts on the Aussie, in our daily report "FX Thoughts for the Day"