Why Is The Australian Dollar (AUD) So Strong?


(US) Asian markets rallied strong in the session as major US names like IBM and Ebay reported strong results after the close.

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(CN) Renewed chatter that China’s PBoC could again cut the RRR gave boost to the AUD.

(DE) AUD/USD hit an 11-week high against the USD at $1.04 as Germany’s Bundesbank said it expected to diversify more into the A$ in Q3.

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(CZ) Czech Central Bank disclosed it had bought $500M-1.0B worth of in the first half of 2012 (previously Russia Central Bank had said it was increasing its Aussie dollar holdings)

(AU) RESERVE BANK OF AUSTRALIA (RBA) JUL MEETING MINUTES:

  • Appropriate for interest rates to be a little below average given evidence of slower global growth and the low rate of inflation Policy.
  • With a material easing in monetary policy having occurred over the preceding six months or so, and with recent signs that the domestic economy had a little more momentum than had earlier been indicated, members saw no need for any further adjustment to the cash rate at this meeting.
  • Australia’s terms of trade were estimated to have declined a little further in the June quarter, although they remained at historically high levels.

How to interpret these headlines?

With positive earnings report out of U.S. and the potential for more aggressive easing from China, following 2 benchmark interest rate cuts in just under a month, Australian Dollar is obviously benefiting from the growth measures by its largest trade partner, not mentioning the general risk demand flows… Of course, the comments out of Germany’s Bundesbank added more credibility to the Australian economy and brought a lot of flows to the AUD today, pushing it to the 1.0450 level.

Looking at the recent RBA Meeting Minutes, it is clear that RBA considers current rate to be a bit “lower than average”, and that further cuts are not warranted at this time… Arguably, this is a signal that RBA could be done with easing for the time being, and if the situation in Europe does not deteriorate further, RBA could even get back on the horse for rate hikes.

However, despite the optimism in the AUD today, here are some points to consider:

  • China’s growth has slowed and faces risks of a “hard landing”
  • European uncertainty continues with Spain, Italy, and Greece
  • U.S. economic data pointed to more headwinds in its recovery, but not enough to launch QE3

I believe this rally in the AUD will be capped around recent levels, but the focus will be on EURUSD.  If EURUSD were to make a comeback above the 1.2500 level, then I would see AUDUSD make further gains… But assuming EURUSD’s next move more likely to be below the 1.2000, I think Australian Dollar may be a perfect currency to SELL on rally as traders will punish the AUD on any negative news that hit the wire.

 

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About Henry Liu

My name is Henry Liu and I am a Forex Trader and Mentor. I help traders achieve consistent income trading Forex while spending less time trading. My focus in trading is a combination of Fundamental Analysis, Technical Analysis, and Market Sentiment. Far too many retail Forex traders concentrate on just one aspect of trading, technical analysis, and ignore everything else; it is my goal (and vision) to educate every trader on how to take advantage of news trading and become more balanced traders.

You can find more information about me on my Google Profile.

Comments

  1. As you predicted Henry. EURUSD & GBPUSD downed heavily. Despite Statement by the Eurogroup. I thought it was good news for EURO. But don’t know why such heavy fall in EURUSD & GBPUSD. It just exactly reverse of last 3 Fridays. Thanks for your valuable research.

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