Where next for the Australian Dollar?

Australian Dollar
The past couple of weeks have seen some interesting moves in the Australian/US currency pair (AUD/USD) – first the sell off, then the bounce – what does all of this really mean for you?

Australian Dollar – The key factors

Interest rates in Australia have been cut pretty harshly by the RBA over the past 8 months – rule number one when trading FX is falling interest rates invariably means a failing currency. This has been particularly true of the Australian dollar vs the US dollar (AUD/USD).

While US interest rates have been maintained at very low levels, by the Federal Reserve, the RBA has undertaken a sustained period of rate cuts – 2.25% in total over 2 years, in response to sluggish data.

As such we have seen the Australian dollar peel back from the 1.05 level to a recent low of 0.89. However, the rate cutting campaign by the RBA is likely to be on hold for the next few months as the wave of cheap money in the market takes hold and its impact is digested. This has seen the AUD/USD rebound to 0.935.

One of the primary concerns for the RBA is the potential for a housing bubble, particularly in Sydney. As such, a more prudent stance from the RBA is expected and hence the rebound in the Australian dollar. Underlining this is also the lag effect of previous rate cuts, still coming through – and their impact will be watched very closely, both in terms of asset prices and CPI. Neither can be allowed to get out of control.

The second factor at play here, is the “tapering of the US fiscal stimulus”

The biggest spending spree in history – that, of the US Federal Reserve and its fiscal stimulus – was always going to slow down at some point and it seems now is the time. However, like always, markets react to headlines first and facts second. The Fed are spending around $85bn a month – and a reduction is a certainty from this level – but read here reduction, not ceasing of.

Thirdly, is China – it is not game over…

The Chinese economy continues to grow and given the relationship between China and Australia are somewhat tied at the hip, this is a further boost for the domestic market and outlook for the Aussie.

Where to from here?

We would expect to see the Aussie dollar put on some more weight, even from the current level, versus the US dollar. The reason for this view:

1) Recent change in Government providing some certainty for the markets – new mining projects, a Parliamentary majority and a clear mandate
2) Strengthening property market likely to keep rates on hold, for a period
3) According to one analyst I listened to this morning, the next move is likely up!
4) US Fed continuing to add money to the market through stimulus, watering down the value of the US dollar further

So with this in mind, those locking in a US ski trip for Christmas will be rubbing their hands, as will those who enjoy a good online shop! For equities, all of the above provides further support for markets. Fill your boots – a five-year high means people are buying and that is why it is going up and trading with the trend, not against it, is by far and away one of the best ways of making money as a trader.

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