Aussie Weakens on Low Commodity Prices

Aussie Weakens on Low Commodity Prices
February 22, 2016

 
The Aussie performed poorly last year, losing 10% against the US dollar. Things have hardly changed so far this year. The AUDUSD currency pair continues to remain range-bound with a bearish bias. The Aussie dollar is heavily impacted by three main factors, namely, the price of commodities, the performance of the Chinese economy, and the strength of the US dollar.

The price of commodities started cliff-diving in 2013, and is yet to touch the floor. Australia derives a major portion of its revenue from the exports of iron ore. The price of iron ore firmly crossed $100 in 2005 and soared to $180 in 2011-2012. To give it another perspective, the price touched 9x its historic range. Economists attributed the parabolic rise in the price of commodities to quantitative easing (central bank credit expansion), and called the trend simply unsustainable.

As forecasted, when reality struck the market, the commodity prices started to tumble. The iron ore is currently trading at about $50 per ton and is expected to further decline to $40 or lower in the first half of this year. To make up for these falling prices, the big miners have started to ship more. This vicious cycle is expected to take the price of iron ore further downwards. Naturally, this will lead to a further decline of the AUDUSD currency pair.

Invariably, all the commodities are priced in the US dollars. In 2011, when investors started bidding up the greenback, the price of commodities and the currencies of the commodity based economies started adjusting.

The Fed is expected to go ahead with further hikes in the interest rate at least in the second half of the year. That makes the US dollar much more attractive to investors. The situation is exactly opposite in Australia, where the interest rates are currently at historically low level of about 2%. The interest rate scenario is again negative for the Australian dollar.

China is the largest trading partner of Australia and the largest customer of minerals. As China shifts from manufacturing to consumer-oriented economy, it would be increasingly difficult to make a clear forecast about the future demand for minerals.

Moreover, China’s currency reserves are depleting at the rate of about $100 billion per month, mainly due to the actions taken by PBoC (People’s Bank of China) to curb currency volatility. Concerns of further capital controls in China and the possible impact on trade with Australia keeps the Aussie under pressure.

Technically, as shown below, the AUDUSD pair should cross 0.7250 comfortably to draw buyers’ interest. Major support exists at 0.6500 levels. The pair currently trades below the 50-day and 200-day moving average. A decline below 0.7100 will take the currency pair to 0.6500.

AUDUSD analysis - 22nd February 2016

Considering the fundamental and technical weakness, a forex trader can take a short position in the AUDUSD pair with stop loss above 0.7280. The target price for the trade is 0.6500.

The risk to reward ratio is approximately 1:4. A binary options trader can purchase a put option contract with an end of March expiry. The suggested strike price for the contract is 0.6910.

Sammy

Sammy

Sammy is our forex expert, with over 20 years experience in the financial sector, she will be keeping you up to date with the ups and downs of currencies around the world


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