Why I’m Bullish On The Australian Dollar

One of my favorite currencies on a three year outlook is the Australian dollar. There are three reasons for this:

1. In light of the increase in US government spending and the diminishing tax base, I think substantial dollar devaluation is likely over the next 3-4 years. This increases pressure to “decouple” - specifically for China to discontinue buying US Treasury bonds, and to invest that capital into its own economy, which it has been doing. As China invests more in its own domestic economy, it will boost the economies of geographically related countries that can export necessary commodities to China. That’s where Australia comes in.

2. Australia’s central bank, the Reserve Bank of Australia, currently has an interest rate target of 3.25%. In a world where zero percent interest rates are becoming the norm, this is quite appealing, and may attract capital that is seeking the security and liquidity of a currency but with an interest rate yield as well. Put another way, the Australian dollar could be the new carry trade.

3. The Australian economy has, at least for now, remained relatively unscathed by the global economic crisis. In Australia, wages are up, business investments are up, retail sales are increasing, the housing sector is expanding, and the country is running a trade surplus.

In light of the aforementioned, the Australian Dollar seems like a viable long-term alternative to the British pound and the US dollar.

Trading the Australian Dollar

Personally I’ve been riding the recent short-term rally in AUD/JPY (Australian dollar against the Japanese yen), though price action is suggesting this rally may be out of steam in the short-term. Patient traders, though, may wish to keep an eye on AUD/USD and look to enter as momentum turns upwards. The chart below illustrates key price points that can serve as areas where prices may consolidate - and thus where traders can look to enter or exit positions.

Disclosure: Long Australian dollar.

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Comment by mjB

2009-03-20 22:47:28

Hyperinflation and the crash of the Keynesian model could be in the offing soon if the Chinese drastically draw down in the USA.

Your analysis on the Australia Dollar is right on and I appreciate your work!

http://tinyurl.com/da295v

mB

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