MARKETS SPECTATOR: Is the dollar about to crack?

Taking a technical view, Goldman Sachs reckons the Australian dollar is an accident waiting to happen.

Goldman Sachs says the Australian dollar appears to be an accident waiting to happen and looks like one of the best shorts.

After the surprise interest rate cut a week ago today, expectations of further easing have taken grip with credit markets now pricing in record low Australian interest rates before mid-2013. And the odds point firmly in favour of another cut this year.

Add in the slowdown we’re seeing in the mining sector and we have the perfect storm for a re-rating of the Australian dollar. And the big end of town agrees.

Below is the technical analysis put together by Goldman Sachs.


* The AUD/broad index shows the performance of AUD versus an equally weighted basket of the "Old World G10” currencies (USD, EUR, JPY, GBP, CAD, NZD, NOK, SEK and CHF) which is AUD-based so higher is AUD-strength and lower is AUD-weakness. A product of the GS Securities Division.

For those not familiar with technical analysis, the above chart is basically showing us that the uptrend that has been in place (rising red line) has given way to a more sideways (flat red line) market. Looking forward Goldman Sachs believes that a decisive move down through the neckline (blue line) would trigger the beginning of a new downtrend.

Based on their analysis, they believe the Australian broad index (Goldman's weighted index against G10 currencies) would then target levels around the 106 mark.

Recent comments in a note from Goldman Sachs Institutional desk support this view. They said that given the dire moves in our terms of trade the Australian dollar looks like an accident waiting to happen. Many participants feel that it can't fall from here and are ignoring fundamentals that say it should be 85 cents right now.

"If I was long the Australian dollar (as a massive number of offshore institutions and hedge funds are) then the upside looks capped at $1.05 -- so limited upside -- but if the downside scenario plays out then these guys are looking at falls of 10-15 cents from here and soon some will crack”, Goldman said. "The Australian dollar looks like one of the best shorts -- only problem is determining whether its now, in four months or still a year away. Most think a year away and so it’s going for the sharp and short term drop”. 

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