It is not an exaggeration that to predict movement of the Australian dollar we need to keep an ear on the door of the Chinese room, and not the Australian one, to catch any whispers coming out.
Some simple facts about the Australian economy:
- Mining sector is almost 19% of Australian GDP.
- Iron ore is one of the most significant exports of Australia, accounting for around 20 per cent of total export values in 2011.
- China is the biggest importer of Australian exports with 29.1% share as per 2011 data. The second biggest importer of Australian exports is Japan, with 17% share.
Because of the facts mentioned above, to a great extent, the strength of the Australian dollar depends on the market sentiments of the Chinese economy.
Some recent bullish expectations about an increase in Chinese urban investments and the sudden weakness of Japanese Yen against all major currencies made the Australian dollar appreciate against the Japanese Yen greatly. The bullish sentiments also came because of the increase in the iron ore prices which started moving up after September 2012 . The price of iron was continuously falling and during September 2011 it had reached below the December 2009 level.
Recent Increase in Iron Ore Prices
Iron Ore Prices - Historical View
Since 2009, AUD/JPY had three peaks. The pair had found a strong resistance after reaching those highs, and on each occasion, it fell very strongly from there. The first high was 88.05 during late April 2012. The fall from there had taken the currency pair to 71.89. The next peak was 90.03 during the early April 2011-- i.e. close to one year after the previous peak level-- and the fall from there had taken the currency pair to 72.05, during early October 2011. Subsequent rise saw a high of 88.63 during mid March. The interesting point to note is that this time again it happened close to one year after the previous high.
The price action of AUD/JPY during past 2 Years
All previous big falls of AUD/JPY came before the pair could test the psychological resistance of 90.00, except one case when it was a simple touch and go and the pair had touched 90.03 but could not sustain. Also, as mentioned above, the gap between each of those highs was close to one year. This time the pair broke all those records and the currency pair shot above 90.00 very strongly and went up to 92.84. This certainly indicates the strength of bullish sentiments.
AUD/JPY weekly chart
What to expect from AUD/JPY:
As mentioned above, China has been in the driver's seat behind the strength of the Australian dollar because of the expectations that there will be an increase in urban investments. The expectations of some strong economic reforms in China to boost the industrial growth added to the bullish sentiments for the Australian currency. The recent general weakness of Japanese Yen fueled the upward gains moves of AUD/JPY to take it to 92.84 level. Considering all these facts, further gains cannot be ignored.
For the near term, we can expect support near 91.15. If this support holds and a break over 92.48 takes place then AUDJPY is expected to target 94.50. 94.50 should bring resistance because of the psychological aspects of 95.00.
On the downside, even a break of 91.15 support should bring stronger support near 90.20. For over two months the pair has not broken below 5-week EMA level and the current 5-week EMA is near 90.20. This support level is also important because of the psychological support of 90.00.
Australian Dollar against the US$
While the Australian dollar has been appreciating against Japanese Yen, movement of AUD/USD has been in a very volatile sideways range for past two years.
The price action of AUD/USD during past 2 years
This fact also indicates that the strength of the Australian dollar cannot be considered as the absolute strength of the currency, and more because of the relative strength against the Yen. The moves which we are seeing in AUD/JPY is more due to the weakness of Japanese Yen, coupled with the overall positive outlook of Australian export sector.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.