The Currency from Down Under Over Performs
Fundamentals
Aussie Dollar futures traded at their highest level in almost 3 months after the Reverse Bank of Australia, the nation's central bank, decided to raise rates 25 basis points. The currency has already gotten a huge boost recently from strengthening commodity prices, and now, the RBA decision has given investors even more incentive to flock to the high yield currency. The healthy economy in Australia leaves the door open for further tightening down the road, while most Western central banks will be limited with regard to tightening rates. The Aussie has posted solid gains against the Euro as well, due to the soap opera that is the Greek financial crisis, indicating this rally could have some legs. China's stimulus packages have created a strong demand for base metals, which suggests that the pace of economic growth in Australia, a major trade partner, may remain robust and outpace many of its Western counterparts. The strong gains posted by the Canadian Dollar, which has traded at parity with the greenback for two consecutive sessions, may also create a buying opportunity for the Aussie. Traders who may see the Canadian as overbought may decide to exchange loonies for Aussie Dollars in order to stay long higher yielding currencies from commodity-based economies. The Australian currency is not without risks, however. The strong gains in the Crude Oil market have provided a boost for commodities as a whole, and commodity-based currencies. If the high price of Oil is seen by traders as too much of a burden for the recovering global economy, prices of commodities may give back some of their recent gains. This could have an adverse effect on the Aussie.
Trading Ideas
The fundamental outlook for the Aussie Dollar remains extremely favorable. The strength of the Australian economy and favorable interest rates could entice some traders wishing to exit Euros and disappointed in the low yield of US Dollars. The chart, however, does not yet support this view. Some traders may wish to wait for the June futures contract to close at or above 0.9400 before entering a long futures position, with a protective stop at 0.9300 and an upside objective of 0.9700. The trade risks approximately $1,000 for a potential profit of $3,000.
Technicals
Turning to the chart, we see the June Aussie Dollar contract taking-out relative highs made a month ago. This suggests that prices, at the very least, could test 2010 highs at 0.9275 made in mid-January. On the weekly chart, we see prices approaching the upper boundary of the downward sloping consolidation area. A breakout of the consolidation area suggests that the market may resume the uptrend it has been in since March of last year, and could possibly break highs made in July of 2008 and trade close to parity.
Rob Kurzatkowski, Senior Commodity Analyst
