As we come to the end of the first quarter of 2014-15, there were soft movements in all the forex majors in Wednesday's trading session with the exception of the Australian dollar. The Aussie took out the 92 cents level against the US dollar and is now trading 7 percent above its mid January low of around 87 cents.
The Australian dollar had been under pressure recently on the fears of potential Chinese corporate defaults and an ailing economy. China's Purchasing managers index (PMI) readings have been slipping steadily and many market participants are putting a high probability on the case that China will introduce a fresh stimulus package.
The main catalyst which has led to the rally in the A$ has been the change in stance of the Reserve Bank of Australia (RBA) from an easy to a neutral bias. Last month, the RBA announced that at 85 cents to the US dollar, the A$ had reached fair or equilibrium value.
Comments from RBA Governor Stevens made Wednesday were not so much about what he said but what he didn't say that sent the currency pair to its highest level this year according to BK Asset Management.
Stevens refused to talk down the currency and in fact didn't overtly mention RBA's discomfort with the level of exchange rate even though it is 7 cents higher than where they would have liked to see it back in December. Even when pressed by a reporter on whether 90 cents is a "line in the sand," Stevens refused to lock the central bank into an exchange rate target.
It should be noted however that automobile giants such as Toyota, General Motors and Ford all decided to cease their manufacturing activities in Australia last month citing the relatively overvalued Australian dollar as a key reason. This will cause the economy a loss of about 50,000 jobs.
The unemployment rate currently stands at 6 percent, a ten year high. On this point Stevens said that “Unemployment has been rising, and will probably rise a bit further yet; growth in labour costs have slowed noticeably in response.”
Thus as the currency moves higher towards the 95-96 cents against the US dollar, we may get news flow of more companies complaining about the strength in the Aussie. However, for the short term, the prudent strategy would be to stay long as the Aussie remains strongly bid.
According to data by the CFTC, speculative short positions were shaved by 35 percent as of last Tuesday. More short positions have been covered and net positions should be currently close to neutral. This would imply that a short squeeze will not contribute much more to the AUD/USD rally.
However, news of Chinese officials signalling at another round of stimulus may initiate the buildup of fresh longs. At this point, one should note that in the past week Copper and the Aussie have moved higher together displaying a strong positive correlation. Thus, the China play is embedded in the trading strategies of both these products.
On the daily technical charts, momentum oscillators indicate that the Aussie is trading in overbought territory . The currency has pushed above the upper Bollinger band and the relative strength index is currently 67, close to the reading of 70, which is considered as a selling entry point. However, it would be unwise to go against the sentiment being displayed by the RBA and the ideal strategy would be to buy on dips.
