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Currency Forecast
AUD/USD Outlook
The Australian dollar quietly sold off against the US dollar in 2005 and continued to do so in the first quarter of 2006. Even though gold prices are pressing against the all-important $600 an ounce level, the decreasing interest rate spread between the Australian and the US dollar has kept pressure on the commodity currency. Growth has also been tepid at best, giving the Aussie another reason to remain depressed as a slowdown in productivity and continued weakness in the housing market weighs heavily on consumer spending. Furthermore, we have seen the Aussie slide in sympathy for the Kiwi dollar, which has fallen 14 percent since the beginning of the year. The Australian dollar has fallen from a recent high of 0.7585 to the low end of the 0.7000 handle. However, as we enter the second quarter, several factors look to be turning the currency bias around, which could help to stabilise the Aussie.
Possible Improvements in Q2 May Force RBA to Reconsider
Since raising interest rates for the very last time in March of 2005, the Reserve Bank of Australia has remained cautious on growth and has left their overnight lending rates unchanged at 5.5 percent, but after a considerable period of slowdown, central bankers may be presented with a different picture. Business investment is showing signs of potentially increasing as optimism has spread thanks to improved conditions according to the most recent manufacturing performance index. Sector performance in the month of March rose 6.5 points on a monthly basis, bringing the measure higher to 53.2 from 51.4 a year ago, according to the Australian Industry Group. What is notably significant, and has powered the higher manufacturing readings, has been the rise in consumer confidence. Although remaining unchanged in the month of April, the consumer confidence gauge published by the Westpac Banking Corp and Melbourne Institute soared to a seven month high of 110.7. This is the fourth consecutive rise fueled primarily by the rebounding housing sector. Housing finance for example increased 1.1 percent. Coincidentally, employment has also posted impressive results. Rising a strong 27,000, the national jobless rate moved back down to 29 year lows as employers retained help in anticipation for rising demand. With a tighter labour market, wage costs are sure to rise through higher earnings. Coupled with rising housing valuations, consumer confidence bolstering spending and potentially higher wage growth, central bankers may be coerced into reconsidering further preemptive inflationary measures.
Soaring Gold Prices Boost Aussie
Along with rising fundamentals, inflation looks to be further stoked by commodities that have come back into vogue. First and foremost, traders have boosted gold prices to record highs in the month of April. Remaining the worlds second largest producer of gold, the Australian economy has much to benefit from contracts that are currently trading above 25 year highs and look to rise higher in the coming quarters. Demand from many central banks like China to have some reserves invested in tangible assets like gold has spurred demand for the yellow metal. Pulling back to slightly below the $600 a troy ounce figure, the gold metal hit a high of $603.50 earlier in the month, causing many to speculate that gold prices could hit $800. Also garnering substantial attention by commodity enthusiasts has been the sharp rallies in silver, zinc, and copper. Copper contracts alone have risen 79 percent on the year with zinc valuations almost doubling in the year. Although not known for copper and zinc production, but rather for iron ore and steel manufacturing, higher bidding on metals looks to benefit the underlying spot as the group is held guilty by association. Nonetheless, speculation on global inflationary pressures and continued demand from China should keep the sector bid, and the Australian dollar should benefit thanks to the currencys 85 percent positive correlation with gold.
China Still Fueling Australian Growth
China is expected to continue its torrid pace of growth this year with officials predicting expansion to continue at an 8.5 percent rate in the first quarter of the year. As a result, massive Chinese demand remains beneficial for commodity export providers such as Australia, New Zealand, and Canada. Feeding the nations demand for iron and steel, as well as machinery equipment and plastics, Australian exporters are expected to focus 25 percent of their attention to the East Asian empire as well as South Korea and Japan. Subsequently, as the worlds third largest minerals owner by value of production as well as its near proximity to China, it is only natural that Australia is Chinas preferred source for imports. Should the pace continue, employment opportunities should expand accordingly. Bullish for the Australian dollar, the higher prospects will surely push wage earnings higher as the labour market remains tight, forcing the Reserve Bank of Australia to consider moving to a more hawkish bias, which would be positive for the Australian dollar.
Conclusion
Although the shift in monetary bias will surely not be immediate, interest rates are likely to be raised once again in a preemptive measure in order to curb inflationary pressure. Here, policy makers will remain steadfast in keeping lower rates of inflation in the economy, preferably below the 2-3 percent benchmark target. With a tight labour market underpinning consumer confidence and ultimately consumer spending, domestic consumption will likely contribute heavily to overall growth and rising prices. This will leave Governor Ian McFarlane with no other decision than to possibly raise rates by 25 basis points to 5.75 percent in the second half of the year, should economic gains continue their current trend. Coincidentally, should speculation hold onto commodity bids, the Australian dollar would also benefit from the inherent relationship.
AUD/USD Technical Outlook
Starting the year with a bang, AUD/USD rallied over 200 pips during the first week of 2006 before consolidating near the upper end of its descending channel that began in March 2005. The February 1st high of .7585 was turned down right at the resisting trendline of the descending channel, and the pair subsequently did a free fall to .7014, holding just above the psychological .7000 handle. The pair did in fact break below the supporting trendline that began in December 2004 at .7200, prompting the wave of breakout selling. However, AUD/USD has recovered in recent weeks, rallying to trade within its former channel.
AUD/USD may be at a turning point. The pair completed a morning star formation at its lower Bollinger Band on the week ending April 7th, signaling that additional gains are likely over the next few months. MACD-Histogram displays a positive slope and CCI has turned up from below -100, confirming a bullish bias. Targets going forward sit at the confluence of the 40 week SMA / 61.8% fibo of .7759-.7014 and resisting trendline at .7460/72 with a break above exposing the 76.4% fibo / 2/1 high at .7580/85. An exceptionally strong rally targets the 9/12 high at .7762. In the event that strength fails to play out, then a test of the 76.4% fibo of June 2004-March 2005 .6774-.7988 bull wave / 3/24 low at .7059/63 is possible. A break below the .7014 low made on 3/29 exposes the intersection of the 6/18 low / 38.2% fibo of .4818-.8001 at .6772/87.
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