MARKETS SPECTATOR: Finding value in the modern dollar

The increased demand for Australian dollars has meant the old rules no longer apply fully when trying to predicting its moves. Trading the dollar is a harder game but there are still opportunities.

Long gone are the days when anyone contemplating a trip to the US instantly became a foreign exchange, and usually a successful one in that. During the rampant bull market of mid-2010 to mid-2011, trading in the Australian dollar, from a retail perspective surged as the allure of easy money became too hard to ignore. Inspired by very public forecasts of $US1.20, mums and dads with no prior trading experience, let alone in highly leveraged products, opened trading accounts to buy Australian dollars.

Fast forward and the days of ‘a rising tide lifts all ships’ are nowhere to be seen. Successfully trading the Australian dollar has become a much harder game, with many conflicting forces now at play. Typically the Australian dollar was seen as a proxy for global risk, rising strongly when commodities and riskier assets were in favour. However, this relationship has largely broken down over the last six or so months. Normally, historical correlations would have seen the Australian dollar decline significantly following the slump seen in iron ore and coal prices over the last six to 12 months. However, this hasn’t been the case as the currency has remained stubbornly high.

This is simply due to the demand for Australian dollars, which is being driven by the premise that Australian assets are a pseudo safe haven, especially when compared to the financial problems plaguing much of the developed world. Also, with interest rates so low in Europe and the US, investors looking for any type of real return on their funds are being forced to look far and wide. A cash yield of 3.5 per cent and some stock yields of north of 5 per cent has made investing money in Australian assets very attractive indeed.

So we’ve basically got a tug of war between these major drivers and they’re unlikely to disappear in the short term. That said, there’s plenty of trading opportunities for those with some experience under their belt.

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Source: The Bourse

The above chart of the Australian dollar, on a weekly basis shows the range the dollar has been oscillating in since early last year. Over time that range has been contracting with upside resistance now around the $1.05 to $1.06 mark and downside support seen near the $0.97 to $0.98 cent level. Also, the midpoint around the most recent low of $1.02 will probably also see some buying support.

The general feeling in the market is that the risk is definitely to the downside for the Australian dollar, with the above price action over the last few months confirming this view. Most recently, the market has made two attempts to move up through the $US1.06 level without success, indicating there are plenty of willing sellers around the $US1.06 figure. From here, price action is pointing towards a move lower to test support around the $US1.02 level.

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