Aus and NZ Dollar Plummet as Central Banks Seek to Lower Overvalued AUD and NZD Exchange Rates

The decline comes as the governor of the Reserve Bank of Australia warns risks to Australian banks were increasing and borrowers would be the first in line to wear the pain of a correction in house prices..

The cloudier fundamental outlook hinted at by Governor Stevens reinforces the negative technical setup behind the Aus dollar which suggests further declines should not be ruled out. Indeed, as we reported here, 2015 does not bode well for the Aussie.

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Stevens Warns on Australian Economy

Stevens spoke to the Economic Forum in Melbourne and warned the housing market presented a direct threat to the Australian economy.

"The RBA’s assessment is that the risk from the current strength in housing markets is more likely to be to future household spending than to lenders’ balance sheets," Stevens said.

"However, the direct risks to banks will rise if current rates of growth in investor lending and housing prices persist, or increase further."

New Zealand Dollar Adds to AUD Woes

Also presenting a problem for the Aussie is its New Zealand neighbour. The NZ plummeted overnight when RBNZ governor Graeme Wheeler warned the level of the exchange rate for the New Zealand dollar was "unjustified and unsustainable".

The Australian dollar plunged 0.5 pct in the wake of the New Zealand currency's steep drop following the release of the RBNZ statement, which marked an escalation in both central bank's jawboning efforts against the two currencies which they deem as overpriced.

Relief as Chinese Data Beats Expectatations

We are currently witnessing a relief rally in the Aus dollar complex at the time of writing owing to some decent data coming out of China.

"Asian stocks advanced overnight after a preliminary reading of China’s manufacturing sectors showed a surprise improvement this month. The HSBC Flash Manufacturing PMI figure jumped to 50.5, exceeding the 50 estimate. A reading above 50 indicates expansion from the previous month, a welcome sign given the struggles of the world’s second-largest economy has had recently," says Lee Mumford at Spreadex.

Despite the relief, "trend and momentum indicators remain comfortably bearish, decent option barriers at 0.8900 are tipped in New York settlement," says Ipek Ozkardeskaya at Swissquote Research.

Australian Dollar Under Relentless Pressure

We have reported that forecasts for the Australian dollar has deteriorated with a slowdown in the economy predicted in 2015.

http://www.poundsterlinglive.com/aud/1569-aus-dollar-aud-exchange-rate-44543

It would appear that fears of a slowdown are being clearly reflected in the performance of the AUD at the present time.

Boris Schlossberg at BK Asset Management tells us the Aus dollar may have found some support:

"The Australian dollar has been under relentless assault over the past several weeks as the pair broke one support level after another. One reason for its weakness was the fear of a material slowdown in Chinese manufacturing activity.

"However, today's news allayed some of those concerns and the pair was able to rally. For now support for Aussie lies at 8850 level, but sentiment against the pair remains high negative and it will likely find a fresh wave of selling should it rally towards the 9000 figure. Still as we have been arguing for the past several days the pair is grossly oversold and is due for a short covering move."

BUT - Has the Selloff Gone Too Far?

The Australian dollar has struggled in recent times with charts showing the AUD/USD has plummeted to levels not seen since February. However, those looking to continue selling the Aussie against the US dollar should be wary that the move may be over-extended.

Oversold conditions usually mean a bounce-back is approaching, the sudden fall has seen the team at ICN Financial advise they are staying neutral on the Austrlian currency for now:

"AUDUSD is providing noticeable positive trading after ending yesterday's session below 0.8880, this contradiction between technical factors forces us to be neutral temporarily to monitor the pair at the mentioned level, whereas stability above it supports the possibility of trading positively targeting 0.9000, while trading again below it reactivate the downside move with its next target at 0.8690."