The Long-Term Case for 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 si 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 AUDJPY (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 AUDUSD 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.

Comments

[2banana:]

The big scare about Australia is that their housing bubble is just in the very early stages of popping. Who knows what that will do to their banks, government and currency.

Mar 21 03:23 PM

[razorack:]

The AUD has had a long history of Carry Trade activity. This is not a new phenomena

Mar 22 09:07 AM

[Fabien Hug:]

If you want to diversify, AUS is effectively a good alternative.

Mar 22 11:46 PM

[TradingHelp...:]

Really good call this was at the trough of the recession.

Sep 12 01:47 PM