A Simple Algorithm On The Australian Dollar

Some years back in high school I spent many hours in the computer lab and at home constructing algorithms, before commencing coding for several school project programs. Algorithms are sequenced rules that aid decision-making in programming software. There are standard algorithm constructs, one being the "If, Then, Else" formula. Some readers may recognize the algorithm from Microsoft Excel or some other spreadsheet software. As the Australian Dollar began its slide in mid 2013, there were several conditions I would have liked to see before re-entering my (NYSEARCA:FXA) position. Luckily the If, Then, Else algorithm construct can play a role in this initiative. Some points include:

  • Positive data from China
  • A shift in Australian monetary policy
  • Technical Patterns

The algorithm can be applied to these points and can lead to taking a long position in with a target projection in AUD/USD of 0.968 from current levels, a 4.5% move higher.

If China..., Then..., Else

During China's economic stimulus measures of the post financial crisis of 2008, Australia benefited through its trade relationship with China. Australia's major exports include coal and iron ore, with China having the largest share, approximately 29.5% of all exports. The picture below gives a snapshot of Australia's imports and exports for 2012.

To articulate the strength of the relationship between Australia and China, Australia's A$ 120Bn relationship with China is worth A$ 14,480 a year to the average Australian household.

While China went through its regime change, the economic activity of the sovereign declined. Projections are for economic growth in China to be 7.5% for 2013 and, on average, 7% going forward. This reduction in GDP is in turn a reduction in demand for Australia's goods, particularly coal and iron ore. This reduction is a reason for the decline in the Australian Dollar as of late. However, recently some signs of a pickup in Chinese economic activity have been observed. Monthly Chinese PMIs, industrial output and export data strengthened in July. This demonstrates some stabilization in the sovereign's economy. Latest figures also show that Chinese exports increased more than estimated in August. Shipments climbed 7.2% year over year and were also up 5.1% in July. Improvements in the Chinese economy should aid in the increase the value of the Aussie, or:

If Chinese economy improves Then

Buy Australian Dollar

Else Hold.

If RBA..., Then..., Else

The RBA's recent policies have also been instrumental to the Australian dollar's decline. The RBA reduced its benchmark rate, or cash rate, by 2.25% from May 2011 to present. It is now at a historical low of 2.5%. The chart below shows the RBA's cash rate over the last 10 years.

RBA Cash Rate

The RBA cited below-trend growth and tepid inflation in the Australian economy for the reduction in the cash rate. This was attributed to global growth rates being sub-par, more specifically China. The charts below show Australia's real GDP growth and contributors to growth.

Australian Real GDP Growth

Australian GDP Contributions

Reductions in borrowing costs in Australia relative to the US should lead to a weaker Aussie versus the US Dollar. Alternatively an increase in Australia's borrowing costs, through the increasing of the cash rate (for whatever reason the RBA sees fit, which is most likely improving growth trends with increased expectations of inflation) should lead to Aussie strength. Hence, the following algorithm should be applied:

If the cash rate increases Then

Buy Australian Dollar

Else Hold.

If Charts.., Then.., Else

After trading in a range from August 2012 to May 2013 between 1.05904 to 1.01131, AUDUSD corrected. The slide led the FX cross to levels not seen since August 2010, a low of 0.88473 on 5th August 2013. The Weekly AUDUSD chart appears oversold, with the RSI trading below 30. The chart below shows the weekly price data of AUDUSD.

AUDUSD Weekly Chart

On the short term daily chart AUDUSD appears to be in a double bottom pattern setup. Furthermore there seems to be bullish divergence on the Daily RSI. The chart below is the daily AUDUSD chart.

These observations lead to the following algorithm:

If AUDUSD trades above0.92317 Then

Buy Australian Dollar

Else Hold.

AUD/USD has the potential to return to the 0.968 level if the double bottom pattern completes itself, a 4.5% increase from current levels.

In essence the algorithm is just one method to show that certain rules can be applied to certain positions as strategies present themselves.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.