GDP Growth; The Real Driver Behind the AUD

GDP Growth; The Real Driver Behind the AUD

 
Last Thursday, the nervousness among the investors, triggered by Brexit, took a toll on the AUDJPY currency pair, which hit a low of 75.53. A day later, the currency pair recovered and closed at 76.98. Most of the recovery was a direct result of position winding by the speculators, ahead of the referendum scheduled on Thursday of this week. However, as detailed below, there are some compelling reasons to believe that the downtrend in the AUDJPY pair is over as of now.

Let us take the case of the Australian dollar first. A combination of interest rate, commodity prices, sovereign credit rating, and finally the actions of speculators affect the exchange rate of the Aussie. Beyond these factors, ultimately, it is the economic growth that drives a currency’s trend. In this regard, let us look at the GDP growth of Australia for the period between 2006 and 2014 using the World Bank’s data charting facility.

AUDJPY - Worldbank Charting Software - 20th June 2016

Let us study the economies of the countries in the chart a bit deeper using the cumulative GDP growth since 2008.

EU Economies since 2008 - Worldbank - Analysis

The data indicates that Australian economy continued to perform relatively better than other countries plotted in the chart. This is one of the main reasons for the Aussie to strengthen against all other currencies and the trend will continue until the economy starts faltering.

In the case of Japan, during the recent G-7 meeting, the country tabled intervention as a measure to weaken the Yen. However, the G7 countries were not in favor of intervention. A look at the US Treasury report reveals that a country is considered as a currency manipulator only when its Central bank buys or sells the native currency for more than 2% of the GDP. This means that BoJ can purchase up to $90 billion without over-stepping the rule.

In reality, there exists no real need of purchasing more than $100 million US dollars (& sell the Yen) to create the reversal. The news of BoJ’s intervention would be simply more than enough to trigger a huge rally in the USDJPY pair. Most analysts believe that such a scenario would arise soon. Thus, fundamentally, it is better to go long in the AUDJPY currency pair.

Last week, the AUDJPY pair bounced off the lower band of the declining channel. The lower band now acts as the support, while the upper band acts as the resistance. The stochastic reading below 10 indicates an extremely oversold situation. Thus, we can expect a trend reversal soon.

AUDJPY - Technical Analysis - 20th June 2016

Thus, it is wise to take a long position in the currency pair at 77 levels. A stop loss order can be placed at or below 74.40. The order for booking profit can be placed between 82.20 and 82.80.

A binary trader can look forward to making money by purchasing a one touch call option. Such a contract should have the expiry date in the third week of July. Furthermore, the strike price for the binary option trade should be at 80 or lower.

Traders with greater risk appetite can look at the possibility of purchasing a ladder call option contract.


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