Aussie Dollar Overvalued?

Wednesday, August 3, 2011

A look at the daily chart for the Australian Dollar futures shows major chart support near the 1.0280 area. Some traders who anticipate that this key level will hold may wish to consider exploring selling puts in Australian Dollar futures options with strike prices below this support level. For example, with the September futures trading at 1.0772 as of this writing, the September 1.0250 puts could be sold for about 0.0040, or $400 per option, not including commissions. The premium received would be the maximum potential gain on the trade which would be realized at option expiration in September should the Australian Dollar be trading above 1.0250.

Fundamentals

Is the Australian Dollar overvalued? That is the opinion of the International Monetary Fund (IMF), which believes that the currency from down under is as much as 20% overvalued. Much of this belief comes from the fact that many traders are flocking to the Aussie due to its much higher benchmark interest rate (currently 4.75%) compared to other major global economies. This makes the Aussie a favorite lending currency in so called "carry trades", where traders borrow funds in a lower yielding currency such as the US Dollar or Japanese Yen, and then lend in a much higher yielding currency such as the Australian Dollar. In addition, Australia also has the benefit of its proximity to China and its ability to supply the world's most populous nation with commodities, which is leading to forecasts calling for between 3 and 3.5% growth rate in 2012. The strong economy in Australia has kept the employment picture robust, with unemployment running just below 5% -- a rate that US political leaders would be envious of. However, the Reserve Bank of Australia (RBA) sees its glass as half empty, as the Central Bank has left its cash rate unchanged at 4.75% in the face of what it believes is slowing global growth prospects. In the statement released after the RBA interest rate decision, RBA Governor Glen Stevens commented on some concerns that the current high exchange rate of the Australian Dollar is starting to hurt some segments of the economy. Some traders interpreted these comments to mean that the RBA would not be raising interest rates in the near-term, which sent the currency down sharply vs. the US Dollar, which has fallen over 250 pips since highs were made last week. In addition, there appears to be a "risk-off" sentiment prevailing in the global markets, tied to continued concerns about slowing global economic growth prospects. If this continues, the Aussie may have further room to fall in the near-term, but longer-term; this may ultimately set-up a buying opportunity once the "fear" trade has subsided.

Technical Notes

Looking at the daily continuation chart for the Australian Dollar futures, we notice, prices failed twice in the past several sessions to take-out the contract highs of 1.1005. Since that time, prices have fallen off sharply. and it appears that a test of the 20-day moving average, currently near the 1.0710 area, is likely. The 14-day RSI has turned lower, and has moved to a more neutral reading of 53.44. There is an uptrend line drawn from the June 27th low that should act as major near-term support near the 1.0650 level, with resistance see at the recent high of 1.1005.

Mike Zarembski, Senior Commodity Analyst