Can the Australian Dollar Recovery Last?

The Aus dollar stuck near recent four-year lows, caught up in the market rout that has caused many to shun riskier assets such as the high-yielding Aussie.

As the US Federal Reserve looks to stop its supply of easy money to the world economy countries that offered high yields on that cash will start to lose out.

It is the higher interest rates in places like Australia that attracted this loose money in the first place, which in turn drove up the value of the currency.

There are of course other issues at play when it comes to the Aus dollar's poor performance at the current time, which are discussed below.

For reference, we see the following Aussie dollar levels at the weekend (MARKETS CLOSED):

1. The euro to Australian dollar conversion rate is 0.00 pct down on a day-to-day basis, 1 EUR = 1.4603 AUD.
2. The pound to Australian dollar conversion rate is 0.00 pct lower, 1 GBP = 1.8411 AUD.
3. The Australian to US dollar conversion rate is 0.00 pct higher, 1 AUD = 0.8749 USD.

PS: The above quotes are taken from the wholesale markets, your bank will affix a spread to the rate at their own discretion. By actively seeking out a better rate with an independent FX provider you could get closer to the market and save up to 5% more FX in the process. Please find out how.

China Continues to Weigh

Until China picks up fresh steam we doubt the commodity currency complex will find much traction.

"China’s economy continues to be a thorn in the Aussie’s side after the Asian giant this week reported the lowest consumer prices in years. Until market sentiment stabilises the Aussie and other growth dependent currencies like the kiwi and loonie would be vulnerable to heightened downside risk," says Joe Manimbo at Western Union.

Macro Environment is Negative for the Aussie

We have seen some pretty extreme movements in global markets as of late.

Today's slump during the European morning shows just how willing investors are willing to cut exposure to high yielding assets.

The Aus dollar, in many respects, falls into this category.

When markets sold off we saw the AUD slump in sympathy.

"That big dark cloud continued to hover over financial markets but the greenback regained some poise following a substantial fall Wednesday to three-week lows against the euro and a currency basket. Market confidence has taken a big hit this week as weaker U.S. data suggested the world’s top economy wasn’t immune to the troubles in Europe and elsewhere," says Manimbo.

We reckon that as we move through the remainder of October we could see more of the same volatility - any more sell-offs are likely to catch the AUD in the crossfire.

That said, a recovery will likely deliver some stronger Aussie dollar rates too.

Forecasts Suggest Further Losses Ahead

Looking at the likely direction of the Australian complex we believe much direction will be delivered by the headline AUD/USD pair.

For those with an interest in the foreign exchange market it must be noted that the longer-term outlook for the Aus dollar is largely negative at this stage.

Luc Luyet at Swissquote Research has taken a look at the AUD/USD and tells us:

"In the long-term, the underlying trend is negative. Despite the recent successful test of the strong support at 0.8660 (24/01/2014 low), the long-term technical structure favours further decline.

"A key resistance stands at 0.9112 (16/09/2014 high). Another strong support lies at 0.8067 (25/05/2010 low)."