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The news hasn’t got any better in Europe and at time of writing (Wednesday afternoon, 23 May), the Australian Dollar is continuing to fall against the US Dollar, and is currently trading at 0.9760.
In last week’s edition of the Trading Tutors Newsletter, I compared the Australian Dollar/US Dollar currency pair to the Euro futures contract of 2010. This is revisited in Chart 1 below:
Chart 1
click to enlarge
click to enlarge
Since then, the Australian Dollar has fallen to a low of 0.9742 as at Wednesday afternoon, 23 May.
The overall technical pattern is bearish for the Australian Dollar and it may continue to fall for the rest of the year. Currently the 29 February top is looking quite good to remain the yearly high for 2012.
I’m sure there are many traders, investors and spectators out there scratching their heads over the Australian Dollar’s slide against the US Dollar, especially when you consider the fundamentals. Australia was recently upgraded to a Triple-A sovereign debt rating by all three major ratings agencies (as our esteemed politicians are very happy to tell us!), while America has lost its Triple-A rating and is in danger of being downgraded again. The Australian government has a modest debt - around 10% of GDP - while the US has a staggering 15.7 trillion dollar debt, which is now more than 100% of their GDP.
The RBA overnight cash rate is a ‘whopping’ 3.5%, compared with the US Federal Reserve’s official cash rate of <0.25%. This means that if you bought the Australian Dollar and sold the US Dollar, you would actually receive around 3% interest on your money, just for holding Australian Dollars! This is called a Carry Trade and I will write more about these next week.
In the long run, the US faces major challenges. Less than 12-months ago they experienced some nervous moments as they approached their debt ceiling and it will be interesting to see how the US Dollar fares if and when that ceiling is approached again.
Australia faces its own challenges, with talk of the mining boom easing, slowing, finished or about to crash, depending on who you talk to! But in the long run I think there is a good chance of the Australian Dollar moving considerably higher against the US Dollar.
But we don’t live in the long-term, we live in the ‘now’. You can’t argue with a bearish trend and as you can see in Chart 2 below, the weekly swing chart of the Australian Dollar is very bearish:
click to enlarge
In time, I think the Australian Dollar will provide us with a lucrative ‘buy and hold’ scenario (more on that next week) but for now, this market is only pointing one way: down.
As discussed last week, it is approaching a good area to lock in some profits in the short-term, but there’s a lot of work to do before this market can head back to the upside.
Be Prepared!
Mathew Barnes
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