Australian dollar may be ready for a turn-around

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Summary

The Australian dollar has been one of the weakest of the major currencies this year, down 9.07 percent versus the USD and 6.8 percent on a trade-weighted basis.

AUD decline can be attributed to several factors

  1. UNATTRACTIVE INTEREST RATES: USD short- and long-term interest rates crossed higher than comparable AUD rates early this year. Historically, AUD rates are always higher, helping make it the perennial favorite G10 currency for parking excess cash… until now.
  2. POLITICAL INSTABILITY: On August 24, Australia’s Prime Minister Turnbull was ousted after his support collapsed within his center-right Liberal Party. He was replaced by former national treasurer (and more business-friendly) Scott Morrison. Not one prime minister has completed a three-year term since 2007, so expect an election sooner rather than later.
  3. KEY TRADING PARTNER CHINA: Australia’s trade with China dwarfs trade with all other countries. China’s decelerating economy and trade war with the US do not bode well for Australia’s economy. The weakening Chinese yuan since June has put pressure on the AUD, since these currencies typically move in the same direction.
  4. SOFT COMMODITY PRICES: Prices of metals important to Australia, iron ore, nickel, copper, and gold have been declining since mid-May.


There are some compelling reasons to be supportive of the AUD

  1. STRONG ECONOMY: Australia is benefiting from strong economic growth and record jobs creation. The country has not suffered a recession in almost three decades. The weaker AUD is certainly providing a boost for Aussie exporters.
  2. SPECULATORS POSITIONED EXCESSIVELY SHORT AUD: According to CFTC reports, currency speculators, as a group, have the largest net short AUD position since late 2015. I consider this an overcrowded position, which means it should be difficult for AUD to be pushed much lower from here without a correction first.

 

Technical analysis

The AUDUSD downtrend is intact as it approaches 2½ year lows, just under $0.70. However, the charts provide a few signals that may suggest a pause or even a reversal of that downtrend. First, the AUDUSD is technically oversold on short-term charts (not shown); second, $0.70 has served as a key turning point (yellow ovals) several times over the last 15 years; and lastly, $0.70 is considered by traders as a key psychological level (as it’s considered a major round number).FX Aussie Dollar Downtrend Intact 2018

Final remarks

Summer is over, and FX traders around the world are back at their desks. Trading activity in the financial markets typically increases in September as traders build positions for the final push of the year. Often this renewed activity will either continue or reverse existing trends in a substantial way.

The fundamental and technical factors that have been driving the AUD lower are still relevant and intact, but there are signs that the end may be nigh.

For those firms effectively short AUD (those with expenses down under), it may make sense to take some chips off the table (it’s been a good run), and reduce exposure.

For those firms long the AUD, it may be better to hold tight and wait to see if that $0.70 support level holds. If it breaks with conviction, technical traders see $0.65 as the next target.


Next steps

Please feel free to contact us to discuss or for analysis particular to your situation at fxadvisors@svb.com

Contact your SVB FX Advisor for more on this analysis, and for solutions tailored to your needs.

Read our FX Risk Advisory article FX Forward Strategies for Volatile Emerging Markets.

Source: Bloomberg 2018.

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About the Author

Scott Petruska is Chief Currency Strategist and senior advisor for Silicon Valley Bank’s global financial services group, and is based in Boston, MA. He advises clients on currency and interest rate hedging strategies, and helps them with other aspects of global banking. He regularly writes blogs on topics covering the global financial markets, conducts client seminars and webinars, and speaks at regional financial conferences.

Petruska has more than 30 years experience in the currency and interest rate markets, and has lived and worked in Boston, Chicago, New York City, Singapore and Tokyo. Prior to joining SVB in 2009, he worked at several large international financial institutions, including National Westminster Bank, Irving Trust, Bank of New York, State Street Bank and Commerce Bank. He has been an institutional trader, product developer, analyst, salesperson and advisor.

Petruska has been awarded several professional designations, including the CFA (Chartered Financial Analyst), FRM (Financial Risk Manager) and CMT (Certified Market Technician). He earned his undergraduate degree in Finance & Banking from the University of Wisconsin.

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