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AUD/USD: 3 Reasons Why the Australian Dollar Could Head Higher

Last updated 2/25/2009 10:25 AM ET (GMT -5) 0 Comments - Add your comment

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Kathy Lien

Director of Currency Research, GFT

The Australian Dollar has been trading in a very tight range over the past few weeks and is prime for a breakout.

We have been very bullish Australian dollars  against the New Zealand and Canadian dollars, but it should just be a matter of time before we see the AUD/USD hit 70 cents.  

There are many reasons why we like the currency, but what has changed since the beginning of the year is the world's voracious demand for stakes in Australian resource companies.  Australia is the world's fifth largest producer of copper which has seen its price fall 63 percent since July 2008.  

Here are 3 reasons why we believe the Australian dollar could head higher:

1. Strong M&A Flow: 

With more than a trillion dollars in foreign exchange reserves and a dwindling interest for US dollars, China is looking to park their money elsewhere.  The government has made it known that they are refocusing their efforts domestically and will be spending their reserves on investments that can lead to long term benefits for their country.  With growing resource demand, China is taking advantage of the falling commodity prices.   Since the beginning of the year, they have initiated the process of taking major investments in Australian resource companies.  The biggest cross border M&A deal announced this year is China's proposed $19.5 billion investment in Australia's Rio Tinto Group.  In addition, they are looking to take a $1.7B stake in Oz Minerals and a $359M stake in Fortescue.  These deals are all subject to regulator approvals but it is clear that China is investing heavily into Australia, which should lift the currency and its economy. Cross Border M&A Tables

 2. Rising Gold Prices: 

The recent surge in gold prices helps to lift the output value for Australian gold producers.  Although the price of gold has retreated off its high, the following chart indicates there is strong support at the $950 level.  As gold continues to rise, it shelters Australian gold producers from the global downturn.  

Source: Bloomberg

3.Recession Free: 

Australia is also recession free.  Their economy has been performing very well compared to its peers.  The Reserve Bank has been very optimistic thanks to a weak currency, aggressive interest rate cuts and generous fiscal stimulus.  To the envy of the world, retail sales have increased 5 out of the past 6 months and Australia saw net job growth in Feb.  Although the RBA is expected to cut interest rates next week, we anticipate a less dovish tone in their monetary policy statement.  

With all of these factors in mind, we are particularly bullish the Australian dollar against the New Zealand and Canadian dollars.  However, the triangle formation in the following chart indicates that the AUD/USD is prime for a breakout and we think the breakout will be to the upside.  

Meanwhile the currency and equity markets are turning lower today after a strong rally on Tuesday. In my Daily Currency Focus, I talked about the 3 reasons why the currency market rally was suspicious .  

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About The Author

Kathy Lien began her FX trading career 10 years ago at J.P. Morgan Chase. After graduating New York University’s Leonard Stern School of Business at the age of 18, Kathy joined the bank's interbank FX trading desk and eventually moved to the cross markets proprietary trading desk. In the interbank market, her ability to create solid fundamental and technical analysis from the myriad of information on the market helped her trade forex spot and options. Her experience eventually led her to be chief strategist at Daily FX where she worked until she joined GFT in 2008.

With her knowledge of forex, as well as her experience trading other products, such as interest rate derivates, bonds, equities, and futures, Lien has built a reputation as an international currency analyst. She is frequently quoted on CNBC, Bloomberg, Fox Business and Reuters. Lien has also written for publications like Active Trader, Futures, and SFO magazine. She is the author of the newly updated Day Trading the Currency Market: Technical and Fundamental Strategies to Profit from Market Moves, and the co-author of Millionaire Traders: How Everyday People Are Beating Wall Street at Its Own Game with Boris Schlossberg.

To buy Kathy’s newly updated Day Trading and Swing Trading the Currency Market: Technical and Fundamental Strategies to Profit from Market Moves, click here.