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The Australian dollar has been one of the strongest currencies in the world throughout 2010 and 2011. In fact, the Aussie has basically been on a one way tear to the upside over the last 18 months, with the brief exception of late Spring 2010, when the Greek sovereign debt fiasco reached fever pitch.
However, an interesting turn of events has begun to unravel over the last few weeks. Equity markets began to correct to the downside, commodity markets sold off heavily, and general risk aversion began to peek its head once again, as the U.S. dollar and Japanese yen rallied versus risk currencies such as the euro, British pound, Aussie dollar, and others. In this article, we are going to briefly discuss why the Aussie may be topping out both technically and fundamentally.
In March 2011, market participants were heavily focused on whether the AUD USD would be able to make a sustained break above parity, 1.0000. Of course, the AUD USD not only crashed through parity, but it made a rather sharp move straight into the 1.1000 level. In fact, the pair moved those 1000 pips in just over 1 month. The 1.1000 level proved to be too strong, however.
Note: Past performance is not indicative of future results.
As you can see in the chart above, the AUD USD is beginning to form a very strong topping pattern on the Daily Chart. If you notice the blue shaded circles, we now have 3 subsequent lower HI’s on the Daily chart, which is quite indicative of a potential shift in trend bias to bearish. What we really need to see on AUD USD to confirm heavy selling interest is a strong daily close below the 1.0500 level. We have flirted with the level several times in the last few weeks in currency trading, but the market has quickly rebounded back up each time. A sustained movement and close below 1.0500 would confirm that bearish momentum has strengthened.
The Aussie dollar, of course, is strongly influenced by commodity prices. The Australian economy is heavily dependent on its mining sector due to its extremely rich natural resources. Australia has extremely rich natural gold deposits, and the extremely bullish movement in gold this year has naturally caused a sustained upward movement in Aussie dollar.
However, gold, silver, oil, and other commodities are beginning to show signs of weakness. The heavy sell-off in commodity markets at the end of May could very well be the beginning of a longer term top in commodity markets in general, and if this is the case, then the AUD USD will move below 1.5000, and we will see increased selling pressure in the commodity pair.
Due to its enormously rich natural resources, the Aussie dollar was pushed to all-time HI’s during 2010 and 2011 because of the incredible rally in commodity markets, but the inverse will now occur if commodities correct further to the downside. As the Aussie rallied ferociously during the commodity boom, it will equally be exposed to severe weakness in the case of further commodity weakness.
Reserve Bank of Australia
The RBA has also been consistently raising interest rates over the last 18 months, but it has recently put its rate tightening cycle on hold. This week, the RBA announced that it would once again keep rates unchanged. As other central banks, including the Federal Reserve in the United States, move to begin tightening monetary policy, this decreased interest rate spread between Australia and other countries will most likely lead to Aussie weakness in the near and mid-term.