Traders Flock to the "Dollars from Down Under"!

Fundamentals

Currency bulls are heading to the "land down under", as the Australian Dollar has rallied to its highest levels since April vs. the US Dollar on signs of improving economic data, as well as an end to the uncertainty surrounding the formation of a new collation government. Prime Minister Julia Gillard was able to finally put together a collation government, after recent election results left neither Ms. Gillard's Labor Party nor the opposition Liberal /National Coalition led by Mr. Tony Abbott enough seats in the House of Representatives to form a majority government. With the political situation settled, traders have once again focused on the Aussie Dollar's status as a "commodity currency", especially with solid growth coming out of China, who is one of Australia's major trading partners. Growth and employment in Australia have been robust lately, especially when compared with the US and Europe. This solid growth has allowed the Reserve Bank of Australia (RBA) to increase short-term interest rates to 4.5%, which is well above that of the US, where interest rates are expected to remain in a range between 0.25 and 0.50 percent for the foreseeable future. This wide rate differential has led many large speculators to enter into so called "carry-trades", by borrowing from low yielding currencies such as the Japanese Yen and the US Dollar and using the funds to buy the Australian Dollar. As long as the interest rate differential continues to widen and economic conditions continue to show signs of improvement, the "risk-on" mentally of speculators may continue to support the Australian Dollar as investment funds continue to move into the" non-US Dollars", including the Canadian, New Zealand, and Australian Dollars.

Trading Ideas

With the Australian Dollar currently in bullish hands, traders looking for a continued up-move in the "Aussie" might wish to consider investigating trading strategies which utilize options on Australian Dollar futures. Technical traders will note that there appears to be solid support on the daily charts near the 0.8750 area. More aggressive traders may wish to explore selling puts on the "Aussie", with a strike price below chart support near 0.8750. An example of such a trade would be selling the November Australian Dollar 0.8700 puts. With the December futures trading at 0.9235 as of this writing, the November 0.8700 puts could be sold for about 0.0041, or $410 per option, not including commissions. The premium received would be the maximum potential gain on the trade and would be realized if the December futures are trading above 0.8750 at option expiration in November. Given the risk involved in selling naked options, traders should have an exit strategy in place should the position move against them. One such exit strategy might be to buy back the option before expiration should the option premium trade at three times the price originally received when the option was initially sold.

Technicals

Looking at the daily continuation chart for Australian Dollar futures, we notice prices attempting to test the April high at 0.9330. Prices are now well above both the short-term 20-day moving average and the longer-term 200-day moving average, triggering both long and short- term system buy-signals. However, the up-move may begin to run into some difficulties near the recent highs, as the 14-day RSI is starting to show a bearish divergence. Volume has also been fairly lackluster during the past several sessions, which might be a sign that fresh buying is starting to wane. Major resistance is seen at the April 12th highs of 0.9330, with support found at the 20-day moving average, currently near the 0.9025 area.

Mike Zarembski, Senior Commodity Analyst