Parity under Pressure

FX Strategy Articles > Fundamental articles

We closely follow the AUD/USD pairing here at FX Strategy as it embodies the risk on/risk off world that we currently live in. Australia’s economy is booming thanks to the mining sector and China’s never ending thirst for everything dug out of the ground. So when the markets are feeling positive and want to take on risk the AUD strengthens. Everyone is aware of the USA’s economic state so we won’t go into that here except to say that for this pairing the USD is still the go to safe haven currency, so when the markets are feeling negative the USD strengthens against the AUD.

The other factor the AUD has had going for it has been high interest rates- until earlier this week the official rate was 4.75%. On Tuesday however the Reserve Bank of Australia (RBA) announced a 25 basis point cut and markets are speculating that there are more cuts to come. This obviously has an affect on support for the AUD and if this is the beginning of a number of rate cuts by the RBA then that could certainly mean a continued sell off in the AUD.

After trading at closer to 70 US cents for most of the last 2 decades in the last couple of years the AUD has managed to break through parity. History would suggest that a level above parity is in the realms of overvaluation and recently released analysis by Mr Robert Rennie, the chief currency strategist at the Westpac Bank also has him “questioning what the AUD is doing north of the parity level”.

Using fundamental analysis to determine your FX Strategy requires looking at the macro level big picture and identifying significant misalignments. The AUD/USD could just be one of those misalignments and may be worthy of further research to you.

By Friday Fundamentalist, Published on 5th of November 2011
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