Dollar, Commodities Pressure Aussie
Fundamentals
The high flying Australian Dollar has weakened in recent weeks, due to a stronger greenback and weaker commodity prices. The recent weakness the currency has seen is not of its own merits, as Australia offers favorable interest rates and is seeing its own economic recovery. Also, Australia is an exporter of raw materials to China, which has seen strong growth over the past two quarters. Nonetheless, the exchange rate of currency is heavily influenced by the movement of the US Dollar and commodity prices. Traders have begun to question whether the recent pullback in commodity prices is for real, or if we are simply seeing a correction driven by profit-taking near year-end. The US Dollar has found strength due to concerns over the creditworthiness of European government debt and encouraging economic data. The direction of the greenback will continue to have a major bearing on the Aussie, not only because of the obvious reason of the exchange rate. The US Dollar's movements directly affect commodity prices, which in turn, affect the exchange rate of the Aussie. The Australian Dollar has also felt some pressure from the unwinding of carry-trades before year-end. This time of year tends to be more illiquid, which has made the forex markets more volatile than usual and resulted in a rather sharp drop in the Australian currency.
Trading Ideas
The fundamental outlook for the Australian Dollar has soured in the near-term. Long-term, the US debt load and probability that commodity prices will appreciate do paint a positive picture for the Aussie and could limit its downside potential in the near-term. The technical outlook appears much bleaker that the fundamentals and suggests the Aussie may be in for a rough ride in the near-term. Given the fact that fundamentals have shifted because of outside influences, traders may wish to take a more cautious approach and enter into a bear put spread, buying the February 0.8650 put (ADG00.865P) and selling the February 0.8500 put (ADG00.85P) for a debit of 0.0050, or $500. The trade risks the initial investment for a potential profit of 0.0100, or $1,000, if the March contract closes below 0.8500 on the February 5th expiration date.
Technicals
Turning to the chart, the March Aussie Dollar had confirmed a triple-top formation, hinting that prices could come down to test support in the 0.8500 area. The recent close below the 100-day moving average can also be seen as a significant technical setback for the currency. The stochastics are already at oversold levels, and the RSI has now drifted into oversold territory as well. This could provide the Australian Dollar with some much needed support in the near-term. 0.8500 can be seen as somewhat of a "make or break" level, as a breakdown below this key support level could spark a new downtrend.
Rob Kurzatkowski, Senior Commodity Analyst
