Read CURRENT Forecasts on the Aussie, in our daily report "FX Thoughts for the Day"

1st June,1999

What moves it?
The Australian Dollar is a "Commodity Currency" like the Canadian Dollar. Its fortunes are heavily dependent on the prices of Gold, Copper, Nickel, Coal and Wool. Movements in the Australian Dollar (Aussie) are also dependent on movements in the Japanese Yen, with the two currencies tending to move in tandem. Generally, a stronger Yen has implied a stronger Aussie and a weaker Yen has been followed by a weaker Aussie.

The Movement
After hitting a bottom near 0.5650 in August last year, the Aussie rallied to 0.6750 in May this year, based on a modest pickup in Commodity prices. But, lately, with Commodities falling again the Aussie has been impacted negatively. The most worrying factor for Aussie is the price of Gold which is trading at $ 265.50 an ounce, the lowest level it has seen in 20 years. As long as the sentiment for Gold is bearish, the Australian Dollar is expected to be weak.

Technical Analysis
The current downmove to 0.6450 can be viewed as a normal retracement back to trendline channel support area at 0.64, as seen in the graph above. Also, we can reason that the movement down from 0.6750 was to be expected as the 0.6750 level was the 50% Fibonacci retracement level of the BIG move down from 0.80 to 0.5650. As long as the currency is able to find a bottom at 0.6300, there is a good chance of it strengthening to 0.70 over the next 2-3 months. A fall below 0.6300 ought to see a further fall to 0.60, however.

Inflation and US Dollar
The Australian Dollar will really benefit if the price of Gold picks up. And the price of Gold could well pick up if the fears of Inflation in the USA suddenly intensify. There are, of course, factors such as the rising Bond Yields, the fearful Dow Jones and slow movement out of assets in cash holdings would imply that the strength of the US Dollar could be called into question, at least temporarily. We also need to be mindful that the Forex market is again thinking that the Yen could strengthen to 117.50.

Apart from Inflation, the factor that could support the Australian Dollar is the possibility that with a recovery in Asia, which the USA is not averse to, commodity prices may find a base, if not positively strengthen.

Idea
Buying the Australian Dollar near 0.6300 might be a low risk trade. As the Australian and US Interest Rates are almost identical (6 months Libor being close to 5.18% p.a. in both), there is no "cost of carry" involved in trading the Aussie against the US Dollar. Remember, however, that we need to keep an eye on movements in Gold to able to trade this currency properly.

Read CURRENT Forecasts on the Aussie, in our daily report "FX Thoughts for the Day"