This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here
TheStreet Open House

Aussie in for Rough Times

NEW YORK ( TheStreet) -- The massive rally in the Australian dollar since the end of 2008 has taken a major turn in recent weeks, and a confluence of fundamental factors (both internal and external) suggest that this bearish run will continue.

Price moves in currencies tend to slow during the summer, but this year has been different, as implied volatility in the AUD/USD has hit highs of 15.5%. In early May, I warned of this potential weakness, so at this stage it is important to revisit the bearish case for the currency to see if these declines can continue.

Three separate factors are currently seen moving markets: Unstable credit conditions in China, a possible near-term tapering in quantitative easing stimulus from the US, and the broad expectation that the Reserve Bank of Australia will continue with further interest rate reductions before the end of this year.

So while some sections in the market might be looking at recent Aussie weakness as a new opportunity to buy the currency, there is not much in the fundamental picture to suggest a bullish reversal will be seen any time soon.

At the central bank level, markets are pricing in another 40 basis points in interest rate reductions from the RBA. This would take the country's official cash rate to a new all-time low (from its current levels at 2.75%) and take away some of the relative yield advantage that accompanies long positions in the Australian dollar.

If these expectations turn out to be accurate, the Aussie will lose its position as the highest-yielding currency amongst the majors (overtaken by the currency's counterpart in New Zealand).

At the same time, we are seeing markets reposition themselves for changes in policy by the Federal Reserve. Reduced monetary injections from the Fed could now come as early as September, and this brings with it a supportive climate for the U.S. dollar.

This also suggests that yearly lows in currency pairs like the AUD/USD haven't yet arrived. So, while the recent declines in the Aussie have been drastic, there aren't many reasons to believe we'll see significant bounces from current levels.

1 of 2

Select the service that is right for you!

COMPARE ALL SERVICES
Action Alerts PLUS
Try it NOW

Jim Cramer and Stephanie Link actively manage a real portfolio and reveal their money management tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
  • Weekly roundups
TheStreet Quant Ratings
Try it NOW
Only $49.95/yr

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
  • Upgrade/downgrade alerts
Stocks Under $10
Try it NOW

David Peltier, uncovers low dollar stocks with extraordinary upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
  • Weekly roundups
Dividend Stock Advisor
Try it NOW

Jim Cramer's protege, David Peltier, identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Alerts when market news affect the portfolio
  • Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
Real Money Pro
Try it NOW

All of Real Money, plus 15 more of Wall Street's sharpest minds delivering actionable trading ideas, a comprehensive look at the market, and fundamental and technical analysis.

Product Features:
  • Real Money + Doug Kass Plus 15 more Wall Street Pros
  • Intraday commentary & news
  • Ultra-actionable trading ideas
Options Profits
Try it NOW

Our options trading pros provide daily market commentary and over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.

Product Features:
  • 100+ monthly options trading ideas
  • Actionable options commentary & news
  • Real-time trading community
  • Options TV
To begin commenting right away, you can log in below using your Disqus, Facebook, Twitter, OpenID or Yahoo login credentials. Alternatively, you can post a comment as a "guest" just by entering an email address. Your use of the commenting tool is subject to multiple terms of service/use and privacy policies - see here for more details.
Submit an article to us!
DOW 16,804.71 -238.19 -1.40%
S&P 500 1,946.16 -26.13 -1.32%
NASDAQ 4,422.0850 -71.3050 -1.59%

Brokerage Partners

Rates from Bankrate.com

  • Mortgage
  • Credit Cards
  • Auto

Free Newsletters from TheStreet

My Subscriptions:

After the Bell

Before the Bell

Booyah! Newsletter

Midday Bell

TheStreet Top 10 Stories

Winners & Losers

Register for Newsletters
Top Rated Stocks Top Rated Funds Top Rated ETFs