Simit Patel

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.

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Luke

I totally agree with your analysis. I'm wondering how specifically you would recommend playing this trade? I know there is an AUD long ETF which is one possibility.

Simit Patel

hey luke,

yes, for stock market traders, i think FXA -- the ETF tracking the Australian dollar -- is the way to go. as a forex trader, i favor shorting GBPAUD (selling british pounds, buying aussie dollars) and buying AUDUSD (buying aussie dollars, selling us dollars). fundamentally i think GBP and USD are the weakest major currencies on a four year outlook, so i'm looking to short them against the australian dollar when technical analysis gives me the signal. right now i am in a short GBPAUD trade.

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Unregistered

I bought into FXA several months back (at around 66/67) as a hedge since I have my 'savings' in USD (in the US) and was moving to Australia. It is interesting to see the perspective of Australia from the US, since the perspective of the US from here is quite different. Australians are easy going, hard working, and positive. However, there's certainly inflation here. 3.25% target interest rate is the way the central bank keeps the currency in a solid range. If they went lower, the currency would likely sink (and inflation would rise fast). I agree that AUD seems like a good deal, but year on year, with inflation higher than the US, the AUD will naturally depreciate. I'm not entirely sure how one can see it any other way.

Also, I'm not sure all is so rosy here. Locals are a lot more worried about their jobs than is made out in the US, and the government is spending like money is unfashionable (but the demand for Aussie raw materials is not anywhere near the pre-crisis levels.)

As someone put it - with the government raising money at 6.5% what does this mean to Australian businesses which will have to pay more than that to raise capital.

Simit Patel

hey unregistered,

I think in my opinion and those who tend to be bullish on AUD, it is not so much a case of AUD being a great investment, but rather the other currencies of the world being much worse.

I do see what you are saying, though, and for this reason I would not buy and hold AUD, but would look to trade it when I thought momentum was lining up accordingly.

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Simon Jacques

Hello Simit,

Thanks for the clear posts. They are interesting.
I came to this site because I was searching for a way to go long on the Australian dollar for the long term and be out of the U.S dollar.

My questions pertain to technical analysis for choosing the right time to make the trade.

Briefly, what are the most important indicators? [technically]
How can I learn these easily?
Will this in turn mean I am glued to my computer screen for hours on end each day or have to buy expensive software?
I just want a few pointers, nothing too complex

Thanks, Simon

kkpatel1924

Simit, your call has been just fantastic on the Australian dollar. It even hit the perfect support level and bounced up.

Are you still in the trade and holding?

What is your Target 1 and Target 2? Do you have SL levels also, or are you just going to keep riding this wave?

Thanks.

KKP

Simit Patel

Hey KKP,

I been playing AUDUSD a little bit, but am about break even on it thus far this year. I've also been playing USDCAD, which has a very similar thing going on, and have been able to ride the corresponding trend in that pair. I just re-entered a short USDCAD position yesterday which I noted on my blog.

thanks
simit

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Singapore Lady

Dear Simit,
Since you wrote your original article in March 2009, when AUD/USD was at 0.65 (I wish I found you then!) how do you see the AUD/USD pair in the next 4 months till year end, now that it is around 0.83? What do you consider a good entry - exit point?

Simit Patel

hey singapore lady,

welcome to informedtrades

i actually think your timing is perfect -- i just re-entered a long AUDUSD position today here is my blog on it:

http://www.informedtrades.com/blogs/...-position.html

my forecast is that AUDUSD is headed to 9800, so i am trying to trade accordingly. i've gotten stopped out a couple times already as AUDUSD has been rangebound of late, but i think we will see a breakout to the upside, so i plan on re-entering accordingly when there is sufficient momentum.

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