While not infallible, there are many correlated assets in financial markets that help us to understand where several of them are headed. In the forex market, that is very obvious when it comes to the relationship of USD and gold, gold and AUD, and AUD and USD.
In a nutshell, generally speaking, a strong USD equals a weak AUD. It’s important to highlight that AUD is a so-called commodity currency (very much like the CAD or the MXN, for example). Why is that? Because Australia is a large producer and exporter of commodities – mainly to China. This means that Australia does well when commodities do well – which is the same as to say when China does well.
So, since we are currently seeing a short-term weakness in the USD due to a USD short squeeze on the forex market, and another short squeeze on the oil market, we are seeing the AUD going up. We are also seeing iron going up (Australia is a big iron producer), and, along with oil and other commodities, gold is going up as well (and so is the CAD, with Canada being a strong oil and gold producer).
So, by going long on the AUD, you are essentially betting that China will do well, commodities will rebound, and gold will keep rising (gold is rising due to the many conflicting signs that central banks are bringing out, and due to the fear of negative interest rates and what they can do to financial markets and savers). If you believe that the Fed will not raise rates, that the signs of trouble in China are overstated, and that gold and commodities have further room to grow, then instead of going long on China, gold and commodities, you can simply go long on AUD, which tends to be heavily correlated to all these assets. That is one of the ways to play it, at least – especially if you’re investing in the forex market.
However, if you believe that this oil short squeeze will be short-lived, and that the Fed may indeed raise rates once again, that China’s problems are perhaps actually understated, and that gold’s rally is only temporary, then you’ll do well to go long the USD.
After all, in Egypt, in the UAE and in Venezuela, for example (all heavy oil and commodities producers), there is currently a massive USD shortage. The massive amounts of debt that emerging countries (which are also mostly heavy commodities producers and exporters) have taken in the last years, when the USD was low, are now coming home to roost. The defaults in the oil sector are likely to push oil companies and oil even further to the downside. And the current oversupply of oil in the world is not finding market demand to buy it.
So, if you believe that the deflationary spiral that is sweeping the world is here to stay for a little (or a long) while more, then going long the USD/AUD or short AUD/USD seems like the most profitable investment that you can make.