What’s next for the AUD?

Despite having the highest central bank lending rate among industrialised economies at 4.75%, the AUD seems to have run out of momentum, now trading sideways after an impressive rally of record highs against the USD. That being said, the currency is still trading at near its highest level against the greenback in 30 years.

Regardless, momentum has died down and the triggers that have pushed the Aussie higher over the past two years may fade in the near future, making subsequent large gains less likely.

The AUD rally

After wide-ranging consolidation between November 2010 to mid-March 201, the AUD/USD forex pair jumped more than 13% over the next six weeks, rising to 1.1011 on May 2. The rise has since stalled amid debt crises in Europe and the US and talks about Chinese growth prospects falling.

Since May, the AUD has largely traded between 1.0400 and 1.0800, though it reached a new high of 1.1079 on July 27 before falling again.

Economic outlook

Throughout the financial crisis, Australia remained a strong economic performer with Chinese demand for raw commodity exports underpinning Australia’s growth prospects.

Although some reports have called Chinese growth unsustainable and have warned of an impending hard landing, Katrina Ell of Moody’s Analytics has said that “Chinese policymakers will likely engineer a soft landing for the domestic economy as they move to contain rising inflation pressures.”

A soft landing would ensure that there is still healthy demand for Australian coal and iron ore exports through the remainder of 2011, while infrastructure projects in Asia, alongside Japan’s reconstruction, will sustain demand of Australian steel-making products.

If global growth rises, commodity prices are likely to rise with it, which will boost the AUD. However, given that Asia, the EU and the US are all tightening monetary policy, growth is likely to stagnate, as will the AUD.

That being said, tempered growth projections for China are still very large when compared to Western economies, with 9.4% growth expected in 2011, 8.7% in 2012 and 8.4% in 2013. With China already buying 25% of Australian exports, even reduced Chinese growth should be more than enough to support Australian export growth.

As far as the Australian economy goes, it has hit a soft patch. Although unemployment remains relatively low, employment growth has slowed since 2010. Consumers have also been shopping online and overseas more, due to the strong Aussie dollar, and saving more cautiously due to the rising cost of living, dampening retail figures. The outlook for mining remains positive, but a persistent fall in consumer confidence has cast a shadow over the rest of the economy.

Trading the AUD

Views on the Australian dollar are mixed – some say that it has peaked in the short-term, and will trade sideways for an extended period, while others are arguing that if the AUD/USD pair breaks the 1.1000 level again it could reach the 1.1400 to 1.1500 zone.

With the RBA unlikely to raise interest rates again, Societe Generale and Westpac have said that the AUD is likely to test parity again, and may weaken even further if the global economy slows.

However, there may be opportunities for forex traders to trade the AUD against other currencies – the Reserve Bank of New Zealand has suggested that the AUD/NZD may fall as far as 1.2200, with the 1.2700 to 1.2800 range being an attractive selling opportunity.

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