In my opinion, the best currency pair in 2010 was the AUD USD. Not only was its approximate 9.80% gain this year impressive, but the trade was “clean” with no excessive volatility. In addition, the main trend was up for most of the year while short-term corrections remained at a minimum.
Sure there were sell-offs, but they were not that difficult to comprehend from a technical and fundamental standpoint, for example, traders didn’t have to guess about central bank activity nor did they have to worry about sovereign debt scandals. The Aussie traded higher versus the U.S. Dollar simply on the interest rate differential.
The year started off with the Aussie breaking from .9329 to .8577 before bottoming in February. The initial trigger for the break was the stronger U.S. Dollar. If you recall, traders were loaded up on the short-side of the Dollar until the end of November 2009. So rather than say the Dollar was stronger, let’s just say the short-covering drove the Greenback up while profit-taking pressured the Aussie. The AUD USD bottom coincided with a friendly monetary policy statement from the Reserve Bank of Australia.
“At its February meeting, the Board decided to keep the cash rate unchanged. With inflation moderating as expected, interest rates no longer at exceptionally low levels, and relatively little information available as to the impact of the recent increases, the Board judged it appropriate to hold the cash rate steady for the time being. Looking forward, if economic conditions gradually strengthen as expected, it is likely that monetary policy will need to be adjusted further over time to ensure that inflation remains consistent with the target over the medium term.”
The AUD USD went on a tear which took it from .8577 on February 5 to .9387 by April 12. Some of the rally was bolstered by an interest rate hike by the RBA on March 3. The statement clearly differentiated between the strength in the Pacific Rim region and the still foundering global economy. This meant the Aussie was going to maintain its strength versus the U.S. Dollar.
“At its meeting today, the Board decided to raise the cash rate by 25 basis points to 4.0 per cent, effective 3 March 2010.”
“The global economy is growing, and world GDP is expected to rise at close to trend pace in 2010 and 2011. The expansion is still hesitant in the major countries, due to the continuing legacy of the financial crisis, resulting in ongoing excess capacity. In Asia, where financial sectors are not impaired, growth has continued to be quite strong. The authorities in some countries are now seeking to reduce the degree of stimulus to their economies.”
The RBA hiked interest rates again in early April, citing the economic expansion in its part of the world and the flat growth in the rest of the global economy as the main reason for the benchmark hike.
“At its meeting today, the Board decided to raise the cash rate by 25 basis points to 4.25 per cent, effective 7 April 2010.”
The Aussie was moving higher throughout this monetary tightening time period until the sovereign debt crisis in the Euro Zone encouraged investors to take a step back and lower their demand for higher risk assets and higher yielding currencies. The ensuing liquidation of the Australian Dollar sent the currency down from .9387 on April 12 to .8067 on May 25. At the time, investors thought this debt crisis would curtail the global expansion and send some economies back into recession.
“At its meeting today, the Board decided to raise the cash rate by 25 basis points to 4.5 per cent, effective 5 May 2010.”
“Recently, forecasts for world GDP growth have been revised up again, and growth is expected to be at trend pace or a little above in 2010. Conditions in Europe remain quite weak, though recent data suggest growth is becoming more established in North America. In Asia, where financial sectors are not impaired, growth has continued to be strong, contributing to pressure on prices for raw materials. The authorities in several countries outside the major industrial economies have now started to reduce the degree of stimulus to their economies.”
“Global financial markets are functioning much better than they were a year ago, but sovereign risk concerns have escalated significantly in Europe over recent weeks. This has prompted additional efforts by policymakers to put fiscal policies onto a sounder footing and to provide support for Greece in the near term. To date, there has been very little contagion outside Europe.“
Although the RBA decided to raise its benchmark rate while there was a financial crisis in Europe, it did hint in its statement that this may be the end of the rate hikes for the near-term. “The Board will continue to assess prospects for demand and inflation, and set monetary policy as needed to achieve an average inflation rate of 2–3 per cent over time.” This speculation combined with the dumping of risky assets triggered a huge break in the Australian Dollar.
The AUD USD bottomed on May 25 after the European Union/IMF agreed on new austerity measures and financial aid to bail out the ailing sovereign nations. Aggressive traders returned to the markets and went on a buying spree, driving up demand for commodities and equities. For the time being, it looked as if the world economies had avoided another financial disaster. The ensuing rally took the Aussie back up to .9221 on August 6 when it started another short-term sell-off.
Citing the problems in Europe as the main reason, the RBA voted in June to leave interest rates unchanged. This had been widely anticipated by traders leading to the break during April and into late May.
“At its meeting today (June 1), the Board decided to leave the cash rate unchanged at 4.5 per cent.”
“Since the Board last met, concerns about sovereign creditworthiness in several European countries have been a focus of financial markets. Investors have generally displayed a good deal more caution. As a result, equity prices have fallen and long-term government bond rates have declined outside of the countries most affected by the sovereign concerns. The Australian dollar fell sharply as part of this adjustment. Commodity prices have also softened, though those important for Australia remain at very high levels.”
Rates were left unchanged in July also, leading to a zigzag type charting pattern, but nevertheless with a bias to the upside. Concerns were expressed by the RBA about a slowdown in China and growth uncertainty in Europe.
While the Australian economy remained strong, the RBA felt that more information wound have to be assessed before a new rate hike would be in the offing. Although this reaction didn’t weaken the Australian Dollar per se, it did it in effect keep a lid on the rally.
“At its meeting today (July 6), the Board decided to leave the cash rate unchanged at 4.5 per cent.”
“There are indications that growth in China is now starting to moderate to a more sustainable rate.”
“Caution in financial markets has been evident in the past couple of months, driven principally by concerns about European sovereigns and banks but also by some uncertainty about the pace of future global growth.”
“The current setting of monetary policy is resulting in interest rates to borrowers around their average levels of the past decade. Pending further information about international and local conditions for demand and prices, the Board views this setting of monetary policy as appropriate.”
The Aussie Dollar topped on August 6 a few days after the Reserve Bank of Australia passed on an interest rate hike for the third consecutive month. Traders were concerned that perhaps the problems in Europe had indeed led to contagion and were now affecting China, Australia’s largest trading partner. The subsequent sell-off took the currency down from .9221 to .8770 by August 25. Leading to speculation that perhaps the market had topped out.
“At its meeting today (August 6), the Board decided to leave the cash rate unchanged at 4.5 per cent.”
“The current setting of monetary policy is resulting in interest rates to borrowers around their average levels of the past decade. With growth likely to be close to trend, inflation close to target and the global outlook remaining somewhat uncertain, the Board judged this setting of monetary policy to be appropriate.”
This wasn’t the case however because after its Federal Open Market Committee meeting on August 10, the financial markets began to anticipate that the U.S. Federal Reserve was going to implement another round of quantitative easing which is a fancy term meaning it would print more money to revive the economy. Many experts had pegged November as the time the Fed would announce its plan. This gave traders over two months to speculate how and how much the Fed would be willing to pump into the ailing U.S. economy.
This news also meant the Fed’s monetary policy would remain soft. The decision to inject more cash into the economy would weaken the Dollar by increasing supply and driving down interest rates. So basically what the Fed did during August was green light a rally in risky equities and commodities.
The AUD USD benefitted in a big way from this scenario, not only was the financial system going to become flush with liquidity that would eventually find its way into the speculative asset market, but it also meant that interest rates would remain low. With the RBA holding rates at 4.75 and the Fed near zero, investors seeking the highest yield flocked into the Aussie, driving the AUD USD up to a new all-time high at 1.0182.
In conclusion, it was a “perfect storm” which drove the Australian Dollar to a new all-time high in 2010. And the scenario for the storm was laid out in the RBA’s monetary policy statements throughout the year. With a little help from the U.S. Fed, the Australian Dollar was able to reach parity and better. Citing the possibility that an expensive currency may hurt exports, the RBA surprised investors with another rate hike. This may have helped top the Aussie, but that story will be unveiled in 2011.
James A. Hyerczyk is a Forex, Futures and Equities technical analyst from Palos Park, IL. He is an expert in the techniques of W.D. Gann and specializes in pattern, price and time analysis. Contact James at patternpricetime@yahoo.com or 773-793-8630.
