The Aussie Dollar is a Volatile Risk Trade

The Australian dollar is one of the best performing currencies, after finding support along with other riskier assets in mid-September.  The rally in the AUD/USD is based on the premise that optimism over Europe will continue to increase, as well as a large reduction in speculative positions based on recent CFTC data.


Many Aussie investors are pinning their hopes to a soft landing in China which will allow exports to continue to flow from Australia to its largest customer.   One assumption that will likely continue to AUD/USD volatility driven by uncertainty over issues related to Euro-zone debt.

Recent economic data released in Australia reflects an economy that is not as weak as the interest rate markets are pricing.  The recent employment figures were better than expected showing that employment and jobs growth continue to remain relatively robust.  The interest rate markets in Australia are current pricing in 100 basis points of easing into 2012, which may prove to be too aggressive.  Yesterday’s Reserve Bank of Australia meeting minutes  suggests policy action is predicated on a deterioration in the global backdrop well beyond the current levels, which will likely keep the central bank on hold for the immediate future.

Australia’s current account deficit is likely to be the economic data point that will create the largest volatility in the current pair.    Australia’s current account deficit which is 2.4% of GDP is among the widest of developed countries and a hard landing for China leave the country vulnerable to capital outflows.

After bounding against resistance late last week, the AUD/USD bound support above the 1.01 level.  Trend line resistance near 1.0375, proved to be a solid selling area.  The risk off trade experience on Monday, proved to be too strong for AUD/USD to continue to gain ground.  The recent cross of the 5-day moving average above the 50-day moving after is likely to lend support to the current pair which is poised to re-test trend  line support near 1.04.

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