How high can the Australian Dollar go?

February 9, 2012

FOREX

Joint post this morning with from a mate who is a Forex Dealer for one of the Big Shops, lets call him “Omid” as in the Persian word for Hope, on where he reckons the Aussie Dollar might go this year.

When measured by the annual range the Aussie Dollar has always been a volatile currency but the last decade seems to have stepped that volatility up a notch. Equally as reflected in the table below, over the past 10 years the AUD has mostly closed higher than it has opened.

As the chart from which the table above was derived confirms, the AUD, even with the big pullbacks, has been in a 10yr+ uptrend since bottoming in 2001.  

So, unless we a see financial quarter close under 0.9800 (current 10 period moving average and a very reliable technical indicator), then I can see the AUD trading this year in a 1.0000 to 1.1500 range. My own bias is for a higher AUD then 1.1500 with a move up to 1.2000 not out of the question. The average trading range over the past ten years has been 18c, so what I am suggesting here is well within the realms of recent history.

 Why? 

  • The 10 year trend is upward and continuing; and from a chartists perspective not looking overbought;
  • RBA demonstrated yesterday that they are in no hurry to add liquidity and devalue the currency; as such, interest rate differentials will continue to support the AUD;
  • We have a stable economy with apparently plenty of productive capacity (except maybe for miners looking to recruit skilled labour?)
  • We have weathered every storm over the past 15 years and only got stronger – Asian Crisis, Long-Term Capital Management, Tech Stock Meltdown, GFC Mark I & II and so on.
  • Volatility is low and looks like staying that way and even in the face every head wind we currently see, the AUD continues to find legs.
  • As Shane Oliver at AMP says, AUD under parity is now the anomaly.

Greg here again – abstracting my thoughts about what this high Aussie Dollar is doing to Australian industry and putting my strategist hat on again you have to say Omid has a point here. Obviously from a technical point of view the Aussie has to get past 1.1080 to open up these next bigger moves and while articles such as The Currency That No One Wants to Bet Against?” in the Wall Street Journal anecdotally, suggests the rally, for the moment, might be getting mature.

But Omid’s points are no less valid and are echoed in the Wall Street Article,

It can seem like the currency with everything, most obviously heavy exposure to the punchiest growth story around, via Australia’s huge raw-material exports to China.

But there’s more to it than that. Australia’s banking sector was only grazed by the financial crisis, which hit other developed countries head-on. Its economy never went into recession, when the U.S. and Europe were ravaged. And the good points just keep on coming. As a solid, top-rated sovereign borrower, Australia stands out as an increasing rarity in a world where even the U.S. has lost that accolade.

In this twilight of the triple-A ratings, Australia and its currency shine even more brightly.

And while other developed markets have cut base rates to the bone, and strongly hinted that they will be there for a long time, Australia’s relatively high rate, stuck at 4.25% this month, offers opportunities for carry traders, who borrow at lower rates to splash out on Aussie-denominated assets.

The Australian dollar wins somewhere else, too. “Since the euro crisis broke, there has been an impulse to diversify investments out of Europe,” said Jane Foley, senior currency strategist at Rabobank in London. “This has also helped the Australian dollar, as it’s been an obvious destination.”

You may ask why I’m pushing this theme again when I was on it earlier in the week.

The reason is to warn Australian business and industry that it looks like it needs not only to factor in a higher Aussie Dollar into its forecasts over the next couple of years but one that may trade higher still.

But equally as the ranges highlight and my feeling this rally is getting mature suggests it’s not going to be a one way bet and dips are both likely to be bought and should be used as opportunities to take cover. I can’t see 1.1080 breaking any time soon but the risks are increasing that it does at some point.

Have a great day

www.twitter.com/gregorymckenna

Please remember these are not recommendations for you to trade these are my views and I have my risk management tools and risk parameters that you do not have access to. Thus, 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

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