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Wednesday 26 March 2014

AUD/USD - Australian Dollar Woes Over?

Talking Points:
- Australian economic data is near its apex for 2014.
- The Reserve Bank of Australia wants a weaker currency, doesn’t mean they’ll get it.
- Aussie looks to bottom versus British Pound, Euro, and US Dollar.

The Australian Dollar (AUD) was easily one of the most disliked currencies headed into 2014, after a significantly disappointing performance from April 2014 and forward, including the AUD/USD pair. As many analysts (including this one) sharpened their knives for another dismal performance by the Aussie in 2014, something funny happened: the fundamental conditions present for Australian Dollar weakness disappeared faster than most expected.

The Australian Dollar’s underperformance through the end of last year can be best explained two-fold: first, concern that a slowing Chinese economy alongside failure by the Australian economy to rebalance away from its mining activities would create significant damage; and two, the drawdown in the Federal Reserve’s QE3 stimulus program would dampen the demand for the carry trade.

While the Chinese economy may be slowing (as seen by the recent HSBC PMI Manufacturing report), economic data out of Australia has been roundly better than expected. The Citi Economic Surprise Index was holding up at +49.7 by March 24, just off the yearly high seen on March 13 at +50.6. Considering where this economic data-sentiment index was in mid-January at -19.0, it’s evident that domestically, the Australian economy is performing much better than anticipated.

One of the areas analysts were most concerned with – the labor market – has had a much stronger start to 2014 than recent trends would indicate. At +47.3K net jobs growth in February, the Australian economy added the most jobs since March 2012. This figure was well-above the 3-, 6-, and 12-month jobs averages of +13.7K, +10.7K, and +5.3K; in fact, with the short-term averages above the longer-term ones, it seems the Australian labor market is gaining momentum.

The recent shift if the fundamental factors underpinning the Australian economy may be offering a veritable turning point in the Australian Dollar more specifically, especially against the Euro and the US Dollar.
 
The AUD/USD’s recent ascending triangle formation resolved itself to the upside the past two days, and a longer-term inverse head and shoulders bottoming pattern may be the long-term play. Several former levels that proved as resistance in months (.9085, 0.9140, 0.9165/70) past have been broken, showing that the supply of sellers at these levels have been fully neutralized – the path of least resistance may now be here.

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