The Australian Dollar has enjoyed a very good rally since recording a multi-month low of 0.8659 on January 24th 2014. The extreme correction in the Australian currency was caused by several disappointments out of the Australian economy. In addition comments from the Reserve Bank of Australia favored a weak Australian Dollar in order to boost exports especially to China which Australia depends on for economic prosperity due to heavy dependency on commodity exports.
At the end of 2013 the majority believed that the Australian Dollar would correct below 0.8500, but only record on daily close below 0.8700 at 0.8681 on January 24th 2014. After that date the Australian Dollar stared a very strong rally against the US Dollar. The rally initially begun after economic data out of Australia pointed to a strong than expected rebound and as inflation expectations remained above 2.0% which sidelined the RBA.
In addition the RBA dropped their statement that the bank would favor a lower exchange rate which signaled to forex traders that there will be no further interest rate cuts by the RBA. This event put a floor under the correction of the Australian Dollar and provided a platform for a rally. Adding to the bullish move were economic disappointments out of the US, especially in the labor market as well as production data.
The rally in the AUDUSD has now spanned over 700 pips, but does it indicate a strong Australian economy or did forex traders ignore potential warning signs and need to adjust their positions?
There is now a growing sentiment that the AUDUSD will face a big correction as the Chinese economy slows down which will have a big impact on the Australian economy. In addition to weakness out of China there have been several economic reports released just this week which point to a slower Australian economy. The construction sector continued to contract in March while job advertisements have declined by over 70.2% in just one month.
Business confidence has also contracted by 48.3% in one month alone. Today’s employment report offered two very negative signs on the Australian economy. The labor force participation rate declined to 64.7% and the biggest disappointment was a plunge of 22,100 in the full-time labor force. China’s exports contracted for a second consecutive month and despite all the red flags the Australian Dollar has continued to add to its most recent rally. It appears that we may soon see a reversal to this move as forex traders will adjust their positions to better reflect the real strength of the Australian economy.