While forex reporters and analysts have flocked to North America and Europe over the past few months, little notice has been given to what is happening in the land down under. The Aussie remains the prizewinner amongst developed nations for having withstood the onslaught of the Great Recession with an economy that just keeps moving along to its own drumbeat, like some EverReady bunny.
It also helps to have ample resources buried beneath ground level that every other Asian developing country covets, but what happens when even those engines must ratchet gears down a notch? China, India, Vietnam, Indonesia, and Malaysia have had to cope with declining demand from the West, still in hope that a pickup is near at hand. The result is that stockpiles of resources have been building up. There is slack in the system, and most analysts have assumed that Australia would eventually have to pay the price for this logistical slowdown.
Has Australia paid the price? Many would answer ‘yes’ to that question. The Aussie dollar’s descent into the lower regions began in April of 2013, falling from 1.06 down to 0.88 before mounting a comeback in August. Although a bounce back to 0.97 was in the offing, confidence in the recovery was lacking. The run stopped dead in its tracks in October and fell down to just above 0.86. 2014 has been all about another similar bounce back to glory, but it, too, has faltered, as the accompanying chart illustrates:
By most measures, the Aussie has outperformed market expectations in 2014. Forecasts from every quarter of the industry had already pegged a 0.87 level for the AUD/USD, no higher. To the consternation of all, the Aussie has ranged between 0.92 and 0.95 for the last two months, refusing to go either higher or lower. The highpoint of resistance occurred in textbook fashion, the expected target following an inverted Head-and-Shoulders formation. The question now is, “What’s next?”
If you are looking for a consensus opinion, then you can easily find 4 out of 5 analysts that will swear that the Aussie is headed south. As the Fed in the U.S. pulls back on its bond purchases, pressure on the Aussie will follow, with a double up from the general slowdown in Asia. Add to this mix the political pressure to devalue the domestic currency to help export traders, and then the argument becomes more substantial.
There is, however, a contrarian view that is beginning to find support. A select few believe that the discount from an Asian slowdown is already factored into the current value, regardless of whether logistical slack is expanding or contracting. With Japan and Europe following dovish central banking strategies, the Aussie may actually be transforming into a “safe haven” currency, one where investors feel safe and receive high returns.
As for the RBA, they are stuck between a rock and a hard place. The Australian economy, unlike the recovery back in the UK, is driven by the mining sector. Consumer spending has followed, especially in housing. To lower interest rates might create a housing bubble in home prices, something the RBA wants to avoid at all costs. Lastly, capital flows from Japan have also been in earnest in 2014. Prime Minister Abe has encouraged Japanese investors to invest in riskier assets abroad. Australian bond yields are nearly 4% higher than their equivalents in Japan.
Where do we go from here? I doubt if Australia has a gnat’s chance at the World Cup, but I am sure we will hear their favorite chant, "Aussie, Aussie, Aussie! Oi, Oi, Oi!" Time to tilt a Fosters, and place your bet.
Disclaimer: Trading Foreign Exchange on margin carries a high level of risk and may not be suitable for all investors. The possibility exists that you could lose more than your initial deposit. The high degree of leverage can work against you as well as for you.