Australia – Forex Fundamentals Appear To Be On Holiday

by Bullhunter on June 18, 2010

Global trading markets are searching for a new steady-state stability. Volatility has lessened. However, complete normalcy has yet to return as debt concerns in Europe continue to persist. Stock market expectations range from austerity measures to major infrastructure changes, both of which would take months to orchestrate and then implement.

When sanity returns, fundamentals, other than crisis related shockwaves, may once again materially influence the direction of price behavior, particularly in sensitive currency trading markets.

Forex Traders Ignoring News Headlines

While the rest of the world ponders the merits of various recovery strategies, Australia has quietly been an economic success story. While other G10 countries have struggled with high unemployment and ineffectual monetary policy, Australia has been growing for eighteen months. Judging from the AUDUSD currency chart for the last quarter, Forex traders seem to be ignoring the news headlines.

AUD/USD Currency Chart

As a point in fact, all markets are shaped by every headline, but traders tend to discount some news more than others, or apply heavier weightings when viewing the entire picture. Although news related to debt problems in Greece began to surface in late 2009 and then expanded its scope in February, the severity of the financial crisis was not fully acknowledged until May. The lesson was that a crisis is the most basic of fundamentals, especially when its impacts are unpredictable. Its effect can silence the importance of healthy economic data and their influence over current pricing trends.

Australian Economy Expected To Expand

The Australian economy has certainly outperformed most developed countries around the globe. GDP was up 2.7% in 2009, and is expected to expand another 2% over the first half of 2010. Unemployment is half of the 10% level or above that other countries are experiencing, investments in machinery and equipment are also up, and China’s demand for resource exports continues unabated. The Central Bank has raised interest rates, and for these and many other favorable reasons, Australia may have skirted the global recession that has held Europe and America in its throws.

The best forex indicators paint a picture of relative value between the economies of the two countries that they represent. Intrinsic value is not an issue. Fundamentals are, but a crisis generally will cause a shockwave that must work its way out of the market in much the same way as the ripples invariably dissipate after a stone is tossed into a pond. The Australian Dollar actually began a long-term strengthening move back in 2006. It was approaching parity with the U.S. Dollar when the Lehman Brothers failure occurred in the September of 2008. That crisis brought about a precipitous drop down below the $0.62 level, only to rebound shortly thereafter. Eighteen months later, the 50% Fibonacci retracement level of $0.93 was pierced, a double-top had formed, and the expectations of a fall coincided with the drop following news in Europe.

However, the current fundamentals in Australia are strong. The economy has heated up, and the Reserve Bank of Australia has consequently made six rate increases in the past seven months to withdraw monetary stimulus and calm inflationary forces. New budgets contain a surplus as officials expect national debt to peak at 6.1% of GDP, less than one tenth of the average debt burden of other advanced economies including the U.S., Europe and Japan.

So… Why Has The Australian Dollar Dropped?

With good news all about, why has the Aussie Dollar dropped so precipitously during the two previous global crises? The answer lays in the infamous currency “carry trade”, one of the most popular longer-term Forex trading strategies known to man. Government officials have warned that a serious “carry-trade” overhang on the order of $2 trillion may exist. Many hedge funds and traders have used the Dollar and Yen as the “base” currency and invested where rates were higher, typically this time around in Australia and New Zealand or even in high-growth third world developing countries like India.

A crisis is always followed by a flight of capital to “safe havens”, U.S. treasuries and precious metals being the normal beneficiaries. Increased demand for the U.S. Dollar would force the unwinding of many un-hedged and unprofitable AUD positions, thereby resulting in a falling Aussie Dollar.

The Australian government plans to reduce its debt with new taxes on mines and tobacco. Major exporters of iron ore and coal are notably upset. Parliament must still approve the new taxes, but the uncertainty of economic impacts may have also weakened the national currency. An optimist in the long-term prospects of the Australian Dollar might detect a “reverse double-bottom” in the above chart. That chart pattern, if true, would suggest a strengthening is imminent.

The current rise may soon cross its 200-day moving average of $0.87. However, many analysts believe the Australian Dollar is over-valued and may suffer as other economies recover. With the Aussie Dollar, timing is always everything.

Sean Rasmussen
The Bullhunters Guide
Universal Wealth Creation © 2004 – 2010

{ 14 comments… read them below or add one }

David Pearse July 14, 2010 at 6:28 pm

I too just found this site for the first time.
The Bullhunters Guide looks like an ideal site to bookmark on this subject.

The Forex Traders Ignoring News Headlines is very interesting and I agree that the Australian economy is expected to expand.
Thanks

Reply

Isa July 14, 2010 at 7:16 pm

I have been a subscriber to the Bullhunter for quite some time now, in fact it was through this site that I first got to know Sean Rasmussen, internet marketer etc., and am glad I did.
I noticed that when I typed in your URL it kept sending me to a Google page and it was interesting to see that for all that you are listed fifth which I think is pretty good.

Reply

Renee July 15, 2010 at 4:32 pm

I don’t know a lot about the stock market, let alone australia forex fundamentals, but being interested in wealth building I am sure it is an issue I can’t avoid.

I have realized that headlines do influence the share market quite a bit, but as I am not following all the ups and downs on a regular basis I find it hard to understand what is having what level of influence and why.

So much more to learn :)

Reply

Cathy Howitt July 20, 2010 at 2:47 pm

I’m like you Renee. I know this is an area which I will eventually expand into (probably through pressure from my husband), but I am still getting a handle on other wealth building strategies at the moment.
Cath

Reply

Jayne Pleysier July 16, 2010 at 3:55 am

Trading Forex markets can be very lucrative. I believe that the Australian Dollar seems to be holding very strong in the world markets which, even though it is following the rise and fall of other currencies, it doesnt seem to be rollercoastering up and down as much. We base our success/loss against the US Dollar so having an understanding and feel for these currencies can only help if you are trading Forex Markets

Reply

Jody Chambers July 19, 2010 at 12:33 pm

A lot of information here…I did not understand alot of it fully…it might be time to go find a beginners guide to forex.

Reply

Cathy Howitt July 20, 2010 at 2:50 pm

I have heard about Forex trading for the last few years, but finally I am building up enough interest to start looking into Forex Fundamentals in Australia. This site looks like a great place to start my journey and one day impress my husband with the knowledge i have gleaned from these pages.
Cath

Reply

Ritapepper July 20, 2010 at 8:00 pm

I agree with you Cathy, this does look like a good place to start learning how it all works and this is one area my partner is interested in, I will get him intrested in looking into Forex on these pages

Reply

Elly July 21, 2010 at 10:10 am

Hi Sean

I enjoy watching the movement of currencies against the US dollar. I learnt Forex trading for three years but never went live with it as at the time I did not want to sit in front of a computer all day or night. I know there are ways to resolve this with trailing stops etc but I took to options trading much better.

I learnt to scalp trade as well as it was a little more exciting but very risky.

With Forex trading you need to keep a real close eye on the fundamental and technical indicators. It is important to be listening to world news as well.

Reply

Peter Damien Ryan July 21, 2010 at 12:40 pm

I always seem to be on the wrong side of a swing when I purchase or sell products etc in USD! This is a really good explanation of forex – and why I won’t be investing in it! It just seems too much is based on emotion (?) or reactive impulses – and that makes it a game only for experts.

I really can’t see why markets should be subject to what is essentially volatility based on what should be inconnected events. I mean why should the greek crisis affect us here. I suppose this means I don’t understand it at all!

Reply

Jackie Stenhouse July 22, 2010 at 11:25 am

Trading forex is like an emotional roller coaster. Any tiny bit of news will affect the currency greatly and if you happen to be in it the wrong way, you can lose big time. Saying that, if your in it the right way you can also win big time. We traded for 14 months and had to stop as our mind wasn’t in a good place after taking big losses.

Reply

Elly July 22, 2010 at 8:23 pm

Hi Jackie

I agree that Forex is a tough choice to cut your teeth on in the trading business.

I traded Forex for 3 years but only as a paper trader and I can relate to what you are saying about the spasmodic movements although you can still protect yourself by doing straddle or breakout trades. (using Fibonacci’s?).

Congratulations to you and your husband for not giving up.

I trade options now (live) but as the financial climate is changing I will be looking for a new strategy to trade the downside as the stock market starts trending downwards over the next few years.

Reply

Peter Damien Ryan July 23, 2010 at 12:46 pm

Elly do you have a reference that explains Fibonacci’s rules? I remember seeing something on it years ago – I think in reference to shares – though I could be wrong on that.

Reply

Jazz Salinger July 30, 2010 at 10:57 pm

Hi Sean,

Okay, so I understand very little of what you’re talking about here. I know nothing about Forex fundamentals or anything to do with Forex. For some reason I always thought Forex was something dodgy.

Obviously I’m wrong or it wouldn’t be here. I’ve got a lot to learn.

Reply

Leave a Comment

Previous post:

Next post: