Australia’s challenges reflected in dreadful AUD/USD action The AUD/USD at 0.89284 has been in a state of decline since the January peak at 1.0613 – reflecting the slowdown in growth in Australia’s biggest customer, China, and general economic sluggishness inside Australia’s borders. Will Tuesday’s expected data be a catalyst for a bullish reversal in AUD/USD or will it be just more of the same? Australia: The rise For years leading up to July of 2008, Australia benefited from the general commodities boom raged on as emerging markets – namely China – were in rapid expansion mode. Cities the size of major US cities were being constructed in China at a rate of more than 20 per year at the peak of the boom there. Part of that expansion was clearly due to the preparations for the Beijing Olympics, but a general economic expansion was also being coordinated by the Chinese government. Once the Olympics came and went, however, historically-difficult financial market conditions combined with the natural post-Olympic slowdown in China to crush the equity and currency markets of every country that was feeding off of China’s boom – including Australia. The price drops in all assets paper and hard (with the exception of US Treasury securities) were gut-wrenching and historical in nature. However, once the financial crisis passed, global stocks and commodities recovered quickly and worked to find a “realistic” level based more on economic conditions and less on traders’ whims. The global markets – including most commodities – rallied well over 100% since the bottom in March of 2009. China’s equity ETF (FXI) rallied from a low of 20.09 in November of 2008 to a peak of 47.99 in November of 2010. Australia’s equity ETF (EWA) rallied nearly 200% from March of 2009 to April of 2011 – hanging in there several months after China peaked out. The AUD/USD rallied from a low of 0.6008 to a peak in July of 2011 of 1.1079 – it managed to hang in there a while longer than both Australian and Chinese equities. Australia: The Fall Since the peaks in 2010 – 2011, FXI has dropped over 25% from $47.99 to $34.67, but is well off the lows made in October of 2011 of $28.61. EWA has dropped over 15% from $28.35 to $23.35 after bottoming at $18.91 in October 2011. The more alarming fact is that EWA was almost back up to the 4/11 highs as recently as March of this year. Meanwhile, AUD/USD basically worked sideways to lower from its 7/11 peak until the most recent peak in January above 1.06 (it’s trading currently at around 0.8928). Clearly, everything happening in and around China’s economy has been under pressure – and Australia has been one of the primary casualties. Australia: The present and the Future As has been chronicled by various Australian political and banking leaders recently, Australia is currently far too dependent on global commodities prices – which are heavily influenced by China’s fate. Since China is in slowdown mode, Australia finds itself in the unenviable position of not controlling its own fate. Australia’s future will depend heavily on the country’s ability to transition from a commodities-centric economy to a far more balanced economic system. Elections are coming up in September where the Australian people will place their votes, cross their fingers and hope for the best. It is very unclear what fiscal and monetary policies will be attempted by whomever is in charge. The changes that will be required are not likely to occur because of their monetary policies – so AUD/USD may simply remain depressed for as long as inflation remains benign. Low rates may not help things, but they won’t hurt much either unless inflation pops up. So, there does not seem to be a great deal of fundamental hope for the AUD/USD as little is likely to change unless the data flow out of both Australia and China changes for the better abruptly. Traders will get a fresh batch of information to digest Tuesday morning as Australia will be releasing home prices and trade balance data. Additionally, the Reserve Bank of Australia will be releasing their interest rate decision and accompanying policy statement. The price action recently has analysts thinking the RBA may lower rates by 50 basis points. Maybe that expectation is already priced in – but maybe not. It will be very important to hear what they saying their statement to gauge what their intentions are for the future. Technical outlook for AUD/USD With AUD/USD at 0.8928 currently, technicians are cautioning the AUD/USD bears that the cross is rapidly approaching a key Fibonacci projection down at 0.8812. At that point, they say, a fairly substantial bounce may occur. If by chance first support is broken, no additional projections come into play until 0.8683 – which is horizontal line support on the weekly chart. Short-term resistance now comes in at “correction resistance” at 0.8956 and is backed up by Friday’s high at 0.8969 and then by the 7/12 close at 0.9048.
Posted on: Mon, 05 Aug 2013 23:57:57 +0000
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