Why the Aussie will continue to drift lower

January 17, 2014

Last night, the news that 22,600 jobs were cut from the Australian economy in December caused the Aussie to break through the 0.8836 support level. The Aussie has now reached a three-year low. Recently, Australia’s economic performances have disappointed. This, alongside the expectation that the United States economy will pick up momentum in 2014, leads me to believe that the Aussie will continue to drift lower.  

Immediately after the disappointing Australian employment data, expectations grew that the RBA will look to cut their interest rates, to reinvigorate economic growth. Personally, I feel that the RBA will refrain from this option due to a growing anxiety within Australia that this could lead to a property bubble. In Sydney alone, house prices have increased by 14.5% in 2013.

Although I see the prospect of an interest rate cut unlikely, there are other methods the RBA can implement to devalue their currency. Towards the latter end of 2013, the RBA mentioned introducing currency intervention techniques to lower an overvalued Aussie. Either way, the RBA mentioning the introduction of currency intervention techniques, talking dovishly about their economy, or making future reference of an interest rate cut could inspire a sell-off in the AUDUSD, without actually lowering their interest rates. 

Equally, the World Bank recently downgraded China’s growth outlook in 2014. China is Australia’s main exporter, and any slowdown in Chinese economic growth will have negative repercussions for the Australian economy. It is also worth noting that the previous Australian GDP widely disappointed. This was blamed upon a slowdown in the Australian mining industry and a decreased demand in Australian goods.

Mining previously accounted for 50% of the Australian GDP. However, the mining industry was also Australia’s largest employment sector. This suggests to me that we have not yet witnessed the full correlation that a slowdown in the mining industry can have on the Australian unemployment rates. This could potentially awake the bears in the coming months.

Furthermore, economists are currently estimating that the US economy should grow by at least 3.5% in 2014. Although last week’s NFP disappointed, the adverse weather conditions the United States faced in December likely contributed towards this. Other economic performances, such as Advance Retail Sales, Small Business Optimism and Durable Goods Orders have impressed this month.

There is still a strong possibility that the Federal Reserve will announce another small QE taper at the next FOMC, in two weeks time. Regardless, even if the Fed chooses to decide against a taper in January, they are still set to exit their QE stimulus in 2014. This will increase confidence in the USD and weaken the Aussie.   

In terms of technical observations for this currency pair, I can see that the previous heads and shoulders pattern has extended lower. Additionally, last night’s negative Australian metric data pushed the currency pair below its 0.8836 support level. When I look at my AUDUSD (Weekly) chart, I see future support levels at 0.866, 0.8515 and 0.8421.  Equally, when looking at the RSI, it has not yet reached the oversold boundaries, suggesting the AUDUSD can still drift lower.

To conclude, there is still room for the Aussie to decrease in value. In fact, it would not surprise me if a dovish RBA begins to talk down their economy, threatening an interest rate cut, or other currency intervention techniques. A lower Australian currency would allow the Australian economy to regroup.

Previously, RBA governor Glenn Stevens expressed that the AUDUSD would be ideally valued at 0.85. Bearing in mind the recent economic performances, this could be an achievable value.

Written by Jameel Ahmad, Research Analyst with Blackwell Global.
Follow Jameel on Twitter @JameelAhmadFX.

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