AUD: Bulls Back in Command But For How Long?

AUD, Bulls, Back, Command, For How Long,, Currency Analysis, fx trader, forex Australian Dollar AUD

10 Oct 2016

Moving out of the summer holidays and rising temperatures, one should pay closer attention to market developments and hidden investment opportunities. While uncertainty in certain areas of the currency markets is looming, repositioning one’s investments is increasingly becoming a confusing and challenging task.

The Euro has been in the eye of the Brexit storm, on the one hand, and will most likely remain vulnerable for the rest of this year, while the U.S. dollar, on the other hand, remains trapped in a neutral territory waiting for its first interest rate hike signal by the U.S. Federal Reserve in 2016. Following December’s rate hike, there is a high chance of such an event happening by the end of the year.

Is the U.S. Dollar Bull Market Over?

According to many economists, a bull market in the Australian dollar is underway, particularly in the AUD/USD pair following the aggressive rebound from a 7-year low, near 0.6800. It should be noted that the USD has been in a bull market run against the AUD since mid-2013. Following the Reserve Bank of Australia’s (RBA) decision to trim the official cash rate to a new historic low of 1.50% – the second rate cut this year – and the possibility of the Federal Reserve to at least increase once its interest rate before the end of 2016, we would expect monetary policy to continue being the dominant factor influencing the forex market for the rest of the year, thus the direction will mostly depend on it.

AUD Recovers Ground

The Australian dollar rebounded sharply from a 7-year low and is riding high since the beginning of this year, but those intending to ‘ride the trend’ with the rest of the bulls should think twice before the Aussie resumes its downward trend. The AUD has retained a positive bias on global currency markets over the last few months and trades significantly higher, +5% so far this year, against the USD, for the first time in five years. It should be noted that the AUD peaked at 1.1060 against the USD and since mid-April 2013 has depreciated significantly, falling to its lowest level in nearly seven years, plunging more than 35%. Moreover, it´s been trading positively over the last two years against EUR and 19% higher – following four consecutive negative years – against the GBP.

The extension of the AUD’s appreciation has caught many by surprise as the AUD/USD pair surged nearly ten cents in eight months. A number of factors have contributed to the Australian dollar’s appreciation. These include the rebound in the commodity prices and the mining sector, the stronger than expected performance in the Australian economy and a slower than expected path of rate hikes from the Federal Reserve.  

Chart 1 AUD, Bulls, Back, Command, For How Long,, Currency Analysis, fx trader, forex