Australian Dollar Will Continue Depreciation With Possible Support At $1.17 To $1.20

Includes: AUDS, GDAY
by: Discount Fountain


With lower commodity prices and loose monetary policy, I expect AUD to continue depreciating into 2015.

Based on simple moving averages and Fibonacci retracements, I see support at a range of 1.17-1.2.

The 10-year low of 1.5662 could possibly be repeated in 2015 if economic growth remains sluggish and commodity prices remain depressed.

Since September of this year, the AUDUSD currency pair has seen significant depreciation with the USD rising against AUD from a level of 1.07 to the current level of 1.2275. Moreover, gloomy predictions for the Australian economy at the beginning of December saw the USD rise further against the AUD from a level of 1.18. The combination of lower oil prices and a lower rate of mining investment have taken their toll on the nation's currency, with Goldman Sachs predicting that Australian GDP in 2015 will only expand by 2%, down from a previous forecast of 2.9%. Furthermore, while the Reserve Bank of Australia state that inflation will likely to maintain a healthy rate of 2-3 per cent over the next year, it is acknowledged that a "lower exchange rate is likely to be needed to achieve balanced growth in the economy." On the assumption that the Reserve Bank of Australia will take steps consistent with achieving that goal in 2015, I expect further AUD depreciation going forward relative to the US Dollar.

In the near term, it is likely that the USD will continue to appreciate against the AUD. In taking a look at simple moving averages, we can see that the 20, 100 and 200 day SMAs all slope upward and price has just recently crossed the 20-day moving average. Additionally, we can see that the price is currently trailing the upper Bollinger Band and deviation between the bands remains wide. Therefore, I do not expect there to be a reversal on the basis of technical analysis. However, should there be a reversal I expect that it will happen at 1.2, at the point where the 20 day SMA is currently trading.

Sources: Yahoo Finance/OANDA/Author's Calculations

While I believe a support of 1.2 is more probable, an analysis of Fibonacci retracement trends indicates that a previous reversal occurred at 1.1741, which marks the 50% Fibonacci retracement level. In this regard, I expect support to lie in the range of 1.17-1.2.

Source: OANDA/Author's Calculations

The only time throughout the past ten years in which the USD traded at a significantly higher premium to the AUD was in January 2009, where the pair traded at 1.5662, and in which economic growth in Australia had weakened significantly. Given concerns over lower commodity prices in 2015, I would not be surprised if the AUD depreciated to such a level this year, which would mark a 28% appreciation of the AUD against USD.

Source: Yahoo Finance

On a fundamental basis, lower commodity prices along with central bank policy oriented towards further currency depreciation, signs point towards further AUD depreciation for this year. In addition, technical analysis indicates that in the short-term the USD is unlikely to cease appreciation. Should it do so, I expect support in the 1.17-1.20 range.

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