Oz to me seems like a no-brainer.The Aussie dollar has been beaten down over a commodity slump and a rate decrease by the Reserve Bank of Australia in the face of the ECB’s quantitative easing program.But the real clincher has been the price action over the last few weeks.If you Google Aussie currency news, and review the day to day articles, you will get an idea of what I am talking about. It’s enough to give a day-trader whiplash—Aussie dollar fades, Aussie dollar bounces, Aussie dollar beaten down, Aussie dollar rallies…
I call this a good-ole-fashioned consolidation.After almost reaching parity with the USD last summer, the Australian dollar is building a nice base here in the high seventies.Although the currency could obviously fall further against the USD if the world economy (and especially China) slumps further, I believe investors looks for good value should at least start watching the Aussie for a good entry point and maybe even start taking partial positions.
What catalyst will cause AUD to move higher?Obviously a global economic upturn, with an associated spike in demand for commodities, could push the currency higher against the dollar.This recovery would also weaken the flight-to-quality bid the USD currently is enjoying and provide further AUD upside. There is a delay in the positive effects lower oil prices will have in consumer economies around the world. We have experienced the pain with energy companies as their market caps have been substantially hit with the crude collapse. Now, over the next few quarters, most likely will will get to enjoy the gain as lower energy costs seep into the corporate and personal bottom-lines.China plays an important role here as well.If the Chinese Communist Party can thread the needle and deal with the imbalances in their economy, keep the population happy, and maintain economic growth, then we’ll see a nice AUD rally.
Another likely source of upward pressure on AUD will be the coming QE program by the ECB. Resolution of the Greek situation is also paramount in investor’s minds. As Europe struggles to grow and begins printing even more money to buy sovereign bonds of periphery countries, the euro will become a less valuable and more risky currency. People looking to put their assets in a store-of-value will be looking for alternatives. Australia has been a well-run country for some time and will enjoy some of this flight-to-quality movement as the euro loses trust.
Finally, the USD side of the AUD/USD relationship begs some analysis.Where is the US economy going? There has been a lot of conflicting data recently. In short, if the US keeps growing, interest rates will move higher and therefore the USD will rise against the Aussie unless Australia raises as well. However, if we continue to see economic weakening in America as the oil shale boom winds down and more rigs are taken off-line, all bets are off.
All-in-all, if you are looking for a place to park cash and want to keep your risk as low as possible and still earn a few percentage points yield, take a look at the Aussie currency. I think the risk/reward ratio is positive in here.
L.Todd Wood is a former emerging market debt trader with 18 years of Wall Street and international experience. He is also an author of historical fiction thriller novels. His first of several books, Currency, deals with the consequences of overwhelming sovereign debt. He is a contributor to Fox Business, Newsmax TV, and others. LToddWood.com