Australian Dollar: Trends Higher But a Reversal May Be On the Horizon

Fundamental Outlook for US Dollar: Neutral

- Australian Dollar 9650 Is Resistance
- Australia Ready to Raise Rates if Growth Trends Hold, RBA Minutes Show

The Australian dollar has rallied against the U.S. dollar this week, climbing some 2.36 percent, and finishing as the sixth best performing G-10 currency through Friday’s close. The economic docket in Australia was relatively light this week but the RBA’s minutes from September suggests that policy makers may hike rates twenty five basis points at its next rate decision meeting on October 4th. At the same time, the single currency is benefiting from a change in sentiment as concerns of another downturn in the global economy fade (for now).

The minutes from the Reserve Bank of Australia this past week showed an aggressive stance towards further tightening by the central bank. The RBA stated that they see slightly stronger domestic conditions versus the previous month, and went onto add that higher rates are likely if growth trends continues its course. The increase in borrowing costs will ensure that inflation remains consistent the bank’s target, RBA said. In turn, the Aussie rallied against the struggling U.S. dollar as traders’ priced in an increased chance that policy makers will raise its key overnight lending rate next month. According to the Credit Suisse overnight index swaps, traders believe that there is a 60 percent chance of a rate hike to 4.75 percent from its current level of 4.50 percent. It is also important to look at the Sino-Australian relations due to the fact that China is Australia’s largest trading partner because of China’s demand for iron ore, natural gas, and coal. Though China is not ready to tighten policy, the economy looks to be heading the right direction as growth continues to be supported by its exports market, which has climbed 34.4 percent in August. However, disappointing Chinese PMI manufacturing and leading index reports may weigh on the Yuan in addition to the Aussie. Strength in the Australian dollar is not solely due its domestic strength, but is also attributed to optimism in the global economy as fears of a double dip recession dissipate.

Taking a look at price action, the AUDUSD has rallied to the highest level since 2008. In turn, the exchange rate continues to trade in overbought territory, which is indicative of a correction to the downside. However, traders should not overlook a period of consolidation followed by another rally as recent developments points to additional gains. For example, my user defined the Parabolic SAR crossover signaled for an advancement in the pair on September 1st, and has yet to reverse course, while our speculative sentiment index now stands at -3.7, pointing to further increases in the pair.