This Day On The Street
Continue to site
ADVERTISEMENT
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

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

Check Out Our Best Services for Investors

Action Alerts PLUS

Portfolio Manager Jim Cramer and Director of Research Jack Mohr reveal their investment tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
Quant Ratings

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
Stocks Under $10

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

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
14-Days Free
Only $9.95
14-Days Free
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!
SYM TRADE IT LAST %CHG
AAPL $130.28 0.00%
FB $81.53 0.00%
GOOG $565.06 0.00%
TSLA $218.42 0.00%
YHOO $44.52 0.00%

Markets

DOW 18,080.14 +21.45 0.12%
S&P 500 2,117.69 +4.76 0.23%
NASDAQ 5,092.0850 +36.0220 0.71%

Partners Compare Online Brokers

Free Reports

Top Rated Stocks Top Rated Funds Top Rated ETFs