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Australian Dollar Weakness To Persist

September 10, 2015

The real truth is that in recent times Australian economy got extremely exposed to China overlapping its historical 65 year trading partner Britain.

In this decade, its economy became too reliant on China, as its export surpassed 35 pct, well above second placed Japan that nearly imports 15-17 pct of Australian goods.

Hence, its economy is too dependent on China, which has sharply slowed down. Neither weakness of Japanese Yen is helping the cause. With over 50 pct of its trade exposed to two giant Asian economies, which is itself in a struggling mode, Australian economy is increasingly vulnerable to short term to medium term shocks.

Japan is already struggling from its decade old recession and with China’s economy in a declining trend, Australian economy is faced with many challenges/hardships. In terms of overall trading volume, its economy has already seen biggest fall in 50 years.

China related commodity boom (iron ore/steel, coal, gold, crude oil, nickel, farm product and LNG), is now past history. Massive fall in global commodity prices is further proving disaster for Australia’s ailing economy causing sharp drop in revenue, pointing for a difficult period ahead.

This is mainly because China is presently faced with structural problem that may prolong. Hence, we have to keep in mind, the Australian currency’s relationship, as it strongly relies on exports.

Aussie Dollar is the 5th most actively traded currency that according to Bank for International Settlements (BIS) has a daily average share of 8.6 pct. But again, signs do not look too rosy for AUD.

Poor performance of Australian equity market and disappointing growth rate has dented Consumer sentiment. In last 19 months fell 17 times to below the benchmark level of 100 to average around 96, indicating that it is sidelining optimists view on Australia.

The ongoing declining trend will make a strong case of another Australian rate cut in near term. Unemployment data is another key data to watch along with its export. Unless both the areas make strong contribution towards economy, rate cut cannot be ruled out by year end and hence, Australian currency will remain under pressure.

After China’s surprise devaluation of Yuan, global commodity currencies are already under severe pressure, so weak Australian Dollar too could be helpful to become more competitive. Weaker AUD will also support tourism and foreign students and its exports. Therefore, traders would continue to pick top and sell AUD, as weakness will persist.

AUD @ 0.7045 = In Short-Term, AUD is likely to hold below Key Resistance Level of 0.7420, which could only be possible if 0.7280 surrenders. For further gains, only break of key resistance level would encourage for a test of 0.7780, which is not a favorable move.

Australian Currency is too prone to Chinese economic trend and therefore, poorer economic condition in China would add pressure on Aussie. Suspect that combination of economic slowdown in China and weaker growth in Australia will worsen prospect for Australian Dollar. If FED decides to hike interest rates, it may further add pressure on AUD.

Therefore, in all probability, in Medium Term to slightly beyond, I see more risk for a drop and break of 0.6510 for 0.6150. And in next six to sixteen months time period, I will not be surprised to see a test of 0.5480 zones, rather than Aussie making recovery towards 0.7780, unless China’s economy recovers. Hence, in all probability its growth could slide towards 5 pct to 6 pct zone or if Australian economy makes surprised recover on back of turnaround in commodity prices.


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