by Jon Beddell
Market Update – AUD / USD
Stock markets fall, dragging higher yielding currencies lower. Bank of England halts QE, for now. US dollar surges on safe haven buying.
“…..weighing on sentiment toward the high yielders is the dramatic stock market sell off seen over the last few days. If that trend continues and develops into panic, we could see severe weakness in currencies like AUD, NZD and the Rand. Buyers of these currencies should therefore be on alert for opportunities.”
Stock markets rebounded slightly early in the week, but took a major drubbing yesterday, falling to three month lows. The market has been left punch drunk by the latest sell off, and every indication is that investor fear levels are starting to rise. This is exactly the sort of catalyst that could spark a dramatic unwinding of the so called “carry trade”, where investors have borrowed in low interest rate currencies like USD, JPY and even GBP, and sold those currencies to buy AUD. As the Australian dollar starts to weaken, traders may dump the currency as their losses mount, causing further weakness. The US dollar is benefitting from its safe haven status, and will continue to do so if the stock market “correction” continues. Meanwhile, the Aussie dollar was wrong footed this week after the Reserve Bank of Australia opted to keep interest rates on hold at 3.75%. Investors were fully expectant of a fourth consecutive hike to 4%. Disappointment led to selling, and the Aussie was soon testing the key technical support at 0.8750. It crashed below that level yesterday, reflecting the sharp falls in world equity markets. This is an important development, because it’s the first time the exchange rate has made a new four month low since the up trend first began in early 2009. The technical outlook is therefore negative, and we would only review this stance if the Aussie dollar can climb back above the 0.8800 level.
Any opinions expressed in this document are those of TorFX
analysts. Any analysis and/or forecasts provided are aimed at
helping clients understand market conditions and developing trends.
Clients are wholly responsible for their own trading
decisions.
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