Which Way the Aussie?

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The Australian Dollar has been enjoying exceptional growth beginning from the early global recovery days, boosted by strong fundamentals which were supported by strong exports to China and as well as six interest rate hikes since October 2009.

The Australian Dollar ( AUD ) gained 27% in the 12 months through April 30, being one of the top performers among the world's 16 most-traded currencies. However, since May the AUD has pared about a third of its gains, struggling to stay above 85.00 US cents and continuing to drop even as other riskier currencies, such as the EUR and GBP, gain ground.

The trigger for the decline was the onset of the Euro-Zone debt crisis, followed by the recent signs of stagnation in the Chinese and U.S economy. As China is one of Australia's largest markets, it is heavily dependent on Chinese economic growth and recovery.

Signs of weakness in the Australian economy began to appear as well with recent publications of poor retail sales data and housing figures. Employment, however, continues to remain strong. While the Reserve Bank of Australia ( RBA ) has so far maintained its stance that Australia is expected to enjoy a robust recovery, signs of pessimism among investors appeared flowing the recent interest increase which caused an unexpected drop in the AUD.

Markets now seem to feel comfortable with an interest rate of 4.5%, when only a few months ago the expectation was for a 5.5% by the middle of 2011.

Is the recent drop in the AUD simply general market nervousness regarding riskier assets and commodity-linked currencies, or signs that the RBA has reached a point where it has to reverse course?

The latter scenario seems quite unlikely as the Australian economy, despite the recent discouraging data, remains relatively robust with strong fundamentals. It may mean, nonetheless, that a more prolonged pause in additional interest rate hikes may be expected as the full affects of monetary tightening materialize.

At the moment, all eyes are on the RBA, which holds its monthly policy meeting on Tuesday, for outlook and guidance on future economic policy.

Looking at the chart one can see that the AUD has been experiencing a strong downtrend against currencies which are perceived as risky. In fact, the New Zealand Dollar ( NZD ) is often overshadowed by the more robust AUD as the Australian economy tends to perform better than its neighbor.

- Looking at the chart, a strong downward trend is evident starting May.
- It is also apparent that the RSI for the pair has been floating in the oversold territory.
- Furthermore, the MACD for the pair is at the lower border.

AUD/NZD - Weekly Chart
audnzd 1 week

For more on the AUD, click here .



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Forex and Currencies

Referenced Stocks: AUD , NZD , RBA

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