Wednesday, November 5, 2014

Aussie dollar falls below key support | RBA chief proves prescient

Yesterday the Australian dollar fell below a key support level against the US dollar and in so doing created another long-term lower low, to confirm the existence of a formal downtrend that has been place since early last year (2013).

The fall yesterday was one of the biggest in recent times. The exchange rate against the greenback went to a four-year low. This came as the price of many commodities that are important to the Australian economy are also in rapid decline, in particular Iron Ore, which the country exports in large quantities to China and which is itself now at a five-year low. Record lows abound. Gold and oil are in the same club.

On the US dollar side of the equation the results of the recent mid-term elections, with the ascendency of the Republican Party in both houses of Congress, was a boost to the US unit, as was the decent jobs report from the private company, ADP, which could presage another good Non-Farm payrolls report tomorrow (Friday). The market takes the view that the Republican Party will be pro-business.

RBA chief proves prescient

A word of praise should be reserved for the governor of the Reserve Bank of Australia (RBA), Glenn Stevens. For some time now he has been looking for a weaker Australian dollar in order to assist his economy in the transition it must carry out between a mining driven export economy, which is no longer sustainable, and one that relies on domestic consumption.

To this end he has predicted that a weaker Aussie will eventuate, and that this can happen without further core interest rate decreases. He has forecast that an important driver of this will be a stronger US dollar, based on the ending of QE in the US. Mr. Wheeler could not have foreseen the Republican Party victories mentioned above, but he deserves credit for his overall analysis and for his patience in “allowing the market to come to him”.

In Forex, we should all do that.

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