The Australian Dollar has experienced an extremely volatile trade over the past eight trading weeks. Forex traders have reacted to every data point which caused rapid moves to both sides. Besides technical as well as fundamental factors which acted on this currency, the Australian Dollar continues to face interference from the Reserve Bank of Australia which took a page out of the playbook of Mario Draghi, the President of the European Central Bank.
Prior before the ECB decided to slash interest rates Mario Draghi and other central bank officials have attempted to talk down the Euro in order to prevent an active step in the currency. This was done in order to weaken the currency amid economic problems while remaining credible to the goal of price stability. The RBA is currently engaged into a similar tactic, does this mean an interest rate cut may be on the horizon?
Not necessarily, but forex traders need to be cautious about future meeting. The RBA has pledged long-term interest rate stability which means that interest rates will remain unchanged. Australia is a commodity exporter and heavily relies on the commodity prices as a source of income. The Australian government has attempted to diversify away from the mining sector and therefore favors a weaker currency.
The slowdown in China has dampened demand for commodities which have been in a freefall. Japan entered its second recession in two years and doubts about the health of the Eurozone economy remain. This means that the US is set to drop sharply as well given our interconnected economy. During the financial crisis which started in 2008 the Australian economy emerged first out of its recession and the Australian Dollar rallied sharply. During the global economic downturn it may be once again Australia which will lead the way.
The Australian Dollar dropped sharply, but current levels are below fair value. The RBA continues to talk the currency down, but unless their words are met by actions it is unlikely to have much more effect. When it comes to the AUDUSD the 0.8500 level is where the RBA feels comfortable and recent price action has defended this level. Forex traders should seek long trading opportunities in the AUDUSD as the current upside potential remains very attractive while the downside risks appear to be minimal.
