AUD Crash – 5 Drivers say it’s still biased lower

August 9, 2011


The AUD has fallen 3% in the first 26 hours of this trading week and currently sits at 1.0150 as I write. Last week I said that I thought the AUD would fall to 0.9700 within two months and I continue to hold that view even though it might happen much sooner than expected.

But how does the AUD look now?

As always we need to look at our 5 Drivers model to get a sense of where traders and investors heads are at.

Global Growth: clearly the markets are down grading their expectations for growth. Some of the more bearish commentators such as Nouriel Roubini are now saying the US is going back into recession. It’s probably already there but the key for the AUD is that markets are pricing as such. The chart above of the CRB highlights the recent moves.

Interest rate differentials and Australian growth: The interest rate differentials have been moving against the AUD over the past few weeks as the market assimilates the reality of a slower pace of consumption and domestic growth but also because of the weakness in global growth and the impact on Australia and our exports.

Clearly this is a negative feedback loop for the AUD as it gets undermined both by what’s happening in markets generally but then also a compression in this spread. But this is important to understanding why the AUD can and does fall so hard and fast sometimes.

Global Risk Appetite/Investor Sentiment: I don’t need to say much here given what is happening at the moment and the destruction of wealth that is resulting. At times like these investors run to their home currency, or a genuine safe haven, and traders often move to the sidelines.

The chart above is just a directional movement of the Chicago Board Options Exchange S&P 500 Volatility index, colloquially known as the VIX, mapped against the USD/AUD rate (inverted so you can see the relationship. It is evident that the AUD does not like volatility.

It is a risk asset and it is clear on the basis of this relationship the AUD is at risk once more unless markets settle down.

USD: The USD is nowhere near as weak as might have thought given the downgrade. Two things are important here. Firstly a lot of the money running home is USD’s which is a natural support and secondly there is still no credible large liquid alternative to the USD at present. CHF and gold are doing exceptionally well and GBP is actually doing ok as well but in times of stress the USD continues to be a net beneficiary. This puts downward pressure on the AUD/USD rate.

Technicals: The AUD looks like it made a double top above 1.10. There is/was strong resistance right at the highs on the monthlies. That does not mean the AUD can not test higher in time but for now it needs to find real sustainable support on the very long-term charts. The long-term chart above suggests that this support is in the 0.85/0.90 zone initially.

Shorter term my charts continue to tell me that 0.97 (the green line) is the target zone for a full retracement of the March to August move. But in this context this is a massive level because it is also the bottom of the uptrend line that goes back to the start of the rally in 2009. The uptrend from the QE2 induced rally has broken and while parity will naturally be supportive as well and a bounce at some point may come but the technical picture has turned.

Summing up

Currencies are volatile and none more so of the big traded currencies than the AUD/USD and the associated crosses. It is important to recognise that this is part of the reason why the AUD is such a massively traded pair relative to our share of global economic output.

The AUD has departed from usual transmission recently by being strong in the face of market instability. But as I wrote at the time, the market never actually had a risk off event until the last week, it always walked back from the precipice. Unfortunately, it has gone over the cliff now and as Houses and Holes has written over at MacroBusiness this morning this weakness may persist.

If that is the case then the AUD has further to fall before it finds real, enduring support.

This blog is for information only and does not constitute advice. Neither Greg McKenna nor Lighthouse Securities has taken your personal circumstances, objectives or financial situation into account. Because of this you should, before acting on this information, consider its appropriateness, having regard to your objectives, financial situation or needs.

If you do need economic, investment or financial advice we are happy to help.

Please Email the team at Lighthouse at or Greg directly on

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  1. Australian Dollar – Head Fake? | Lighthouse Securities - August 10, 2011

    […] we had a quick run through the 5 Drivers in our AUD model to assess the outlook – which on balance is bearish. But given the magnitude […]

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