Aussie Dragged Down Under by Credit Woes, Consumer Sentiment
Fundamentals
The continued European debt concerns and potential economic slowdown in China are weighing heavily on the Aussie Dollar. The currency has tumbled more than 800 ticks over a two-week span. Commodity prices, including the base metal sector that the Australian economy relies on, have tumbled in recent weeks on concerns that Europe is quickly losing control over the Greek situation. The extreme measures being taken by Germany, including the ban on short-selling of certain financial securities and sovereign debt, are a sign that financial policymakers may be grasping at straws, trying to stop the bleeding by any means possible. Domestically, the economic uncertainty both domestically and in China have taken their toll on the psyche of Australian consumers, as evidenced by the poorest showing in consumer confidence in over a year and a half. Australia raised interest rates for the sixth time since October of last year two weeks ago. Normally, such a move would be seen as a positive for the high yielding currency because of favorable interest rate parity. The higher borrowing costs have been cause for concern for consumers, who may be weary of opening their pocketbooks. Australian policymakers were looking for a gradual reduction in the exchange rate of the Aussie Dollar, but the sharp reduction in the exchange rate over the past two weeks may be alarming. The sharp fall in the currency could attract some value buying from investors, who may see the decline as too drastic and too quick. If Europe does manage to get a grip on their financial crisis, the Aussie has the potential to rebound sharply. On the other hand, if China continues to restrict real estate speculation and the European situation worsens, the Aussie could find itself continuing to face sustained downward pressure.
Trading Ideas
It looks as though both the technical and fundamental outlooks are stacking the deck against the Aussie Dollar. However, some traders may wish to approach the currency with a bit of caution because of the sharp decline in prices. Some traders may wish to consider taking on a conservative bearish strategy, such as a bear put spread. One such strategy would be buying the June 84 puts (ADM00.84P) and selling the June 83 puts (ADM00.83P) for a debit of 0.0030. The spread risks the initial cost of $300 and has a potential profit of $700 if the June futures contract closes below 0.8300 at expiration.
Technicals
Turning to the chart, we see the sharp sell-off resulting in a violation of support in the .8550 area. The next support areas can be seen near 0.8250 and 0.8000. The 0.8000 level may be of special interest to traders, as it is both psychological and technical support. If prices are able to rebound above the 0.8550 level, the market could find itself trading sideways for the foreseeable future. The rapid decline in prices has resulted in the RSI indicator falling to oversold levels, which may offer a bit of much needed support in the near-term.
Robert Kurzatkowski, Senior Commodity Analyst
