Australian Dollar - Final Trading Day of 2006

The Australian dollar has finished the final trading day of 2006 on a high note. The Aussie held onto a the recently broken resistance level of 79 US cents today even with a thinly traded market which lacked momentum. “There is demand for the Aussie out there but it feels like month, quarter or year-end demand rather than genuine demand,” said Robert Rennie, currency strategist at Westpac Bank in Sydney. The Australian dollar hit a high of US$0.7915 in New York trade with the aussie maintaining its strength in the New York session. The Aussie was weaker against the New Zealand dollar falling from NZ$1.1219 to NZ$1.204. The Australian closed the final trading day at 79.12 US cents up from 78.69 US cents yesterday. The Aussie was also stronger against the Japanese yen from Y93.39 to Y94.10. Locally, the forex market ignored private sector credit numbers showing credit to the Australian private sector rose seasonally adjusted 1.1 percent in November. There is no local data in the first week of 2007, until January 8 when building approvals, retail sales, trade balance, consumer sentiment and employment figures are due in the same week. Interest rates the main focus, with the heavy economic data flow during January 2007 will build momentum ahead of the Reserve Bank of Australia’s (RBA) board meeting in Sydney, February 6, 2006. In the US next week ISM December manufacturing index is due on Tuesday, November construction spending on Wednesday and December non-farm payrolls on Friday.

Some traders are tipping a take profit position on the Australian dollar. With the Aussie hitting highs. The dollar may hit 80 cents in the coming weeks, but for wary traders, perhaps now is the time to take profits with the Australian dollar moving strongly from 78.40 cent level to just above 79 cents in the last week. Note the strong resistance for the AUD/USD currency pair around the highs of 79.33 cents. Any break against the stubborn resistance level would show a upward break toward the highs seen in February 2004. Any hold below the resistance would mean the dollar to hold the trading range all the way to the lows of 77.82 US cents. A downside break below that level may reveal lows to levels of 76.30 US cents.

Australian Dollar

The Australian dollar is the official currency of the Commonwealth of Australia since 1966. The currency is commonly abbreviated with the dollar sign “$”. Other notations used to distinguish the Australian dollar from other currencies are $A or A$, $AU or AU$ and its official ISO currency code is AUD. To locals and currency traders the currency is commonly referred to as simply “the Aussie” or “the Aussie Dollar“. The denomination is divided into 100 cents. The currency itself is the sixth most traded currency in the world foreign exchange markets (aka “forex markets”) behind the US dollar, Euro, Yen, Pound Sterling and the Swiss franc. According to Wikipedia, the Aussie is popular with forex traders because of “the relative lack of government intervention in the foreign exchange market, the general stability of the economy and government as well as the prevailing view that it offers diversification benefits in a portfolio containing the major world currencies (especially because of its greater exposure to Asian economies and the commodities cycle).”

Australian Dollar History

The Australian dollar made its debut on Valentine’s day 1966 (14th February 1966) when the currency replaced the Australian pound and also introducing the decimal system. One pound was equivalent to two Aussie dollars or ten shillings per dollar. The Australian dollar was at that time worth 980 milligrams of gold. (As at December 2006 the Australian dollar was worth 38 milligrams of gold.) From 1946 to 1971 Australia maintained a peg to the U.S. dollar under the Bretton Woods system, but it was effectively pegged to sterling until 1967. In 1967 the sterling devalued against the US dollar, there the Australian dollar remained pegged to the US dollar. With the breakdown of the Bretton Woods system in 1971, Australia converted the mostly-fixed peg to a moving peg against the U.S. dollar. In September 1974 Australia moved to a peg against a basket of currencies called the TWI (trade weighted index) in an effort to reduce fluctuations associated with its peg to the U.S. dollar. The peg to the TWI was changed to a moving peg in November 1976, causing the actual value of the peg to be periodically adjusted. In December 1983, the Australian dollar was deregulated and cut free (”floated” the Australian dollar) from its US dollar peg at 90 cents per US dollar.

So when the Australian dollar floated in 1983 it started life at 90 cents. In 1986 to 1989 the dollar was in the range of rising from 59 cents to 89 cents. In 2001 the dollar fell to all time lows of 48 cents. In 2003 the currency had recovered back to 73 cents. Now as we close 2006, we are seeing the Australian dollar rallying against the US dollar back up to the 79 cents level, with experts betting on a 80 cent level in the next six months.

Australian Dollar Behaviour

Ever since the Australian dollar was floated, the currency rises when times are good, especially when global economic times are good. The currency falls when the global economy is weak and the domestic economy is weak. It is also wise to note that when the dollar falls, it supports exporters, which supports the Australian economy. The dollar reflects Australia’s reliance upon commodity exports such as mineral and farming industry produce - rising as mineral prices rise and falling upon mineral price slumps, strong domestic spending (high imports) or weak export earnings outlook. The currency is attractive to traders because of its high volatility, currency exposure and the interest swap rate.

The Australian Dollar is known around trading circles as a “Commodity Currency” like the Canadian Dollar. The dollars’ fortunes are heavily dependent on the prices of Gold, Copper, Nickel, Coal and Wool. Movements in the Australian Dollar (the Aussie) are also dependent on movements in the Japanese Yen, with the two currencies tending to move in tandem. Generally, a stronger Yen has implied a stronger Aussie and a weaker Yen has been followed by a weaker Aussie.

Reserve Bank of Australia Forex

The Reserve Bank of Australia (RBA) hasn’t intervened in the forex market to influence the Australian dollar exchange rate since 2001. Although the Reserve Bank sold a net of A$246 million and bought a net of A$245 million from the government in the spot foreign exchange market in November in figures released today reveals. So in November, the Reserve Bank of Australia sold a net of A$1 million (In October, the RBA bout a net of A$8 million). The data was included in the RBA monthly bulletin which reflect foreign exchange transactions against the Australian dollar undertaken by the Reserve Bank with authorized foreign exchange dealers in Australia or banks overseas. In November 2006, the Australian dollar rose from US$0.7460 to US$0.7890 in forex trade supported largely from investors looking for yield after the Reserve Bank raised interest rates by a quarter of a percentage point.

Aussie Trade

The Aussie dollar traded firmer today (Wednesday) after favourable crossrates against the Japanese yen. However, Aussie trade was stagnant with little stimulus from local or offshore data. The Aussie dollar has recovered from its recent lows of just below 78 cents and low it lies around 78.41 US cents. The Aussie was up to Y92.59 from 92.06 yesterday. US Treasurys initially fell in response to U.S. November producer price index (PPI) data and a report on housing starts but recovered in the afternoon, closing unchanged. The Aussie traded stronger as a result of crossrates from a firmer Euro / Japanese Yen which rallied after comments from Bank of Japan Governor Fukui suggesting Japan’s inflation and consumption data had been particularly weak. The New Zealand dollar also rose to fresh three month highs against the Aussie from strong consumer confidence data and the kiwi third-quarter current account data.

More Australian Dollar Trading

The Australian dollar recovered somewhat from a daily dip down to US$0.7775 in New York trade and the currency is now hovering above 78 cents. Local economic news is scarce around this time of the year – more major economic news are coming in the new year. Australian Government bonds ended slightly firmer, moving away from their year lows. A quiet U.S. Treasurys market yesterday meant few leads were on offer for local traders. Interest is focused on the release later today for the US November producer price index (PPI) data and a report on housing starts data. At 0530 GMT, the Australian dollar was at US$0.7802, down from US$0.7812 late Monday and against the Japanese yen, the Australian dollar was down from Y92.25 at Y92.10.

Aussie Dollar Trading

The Aussie dollar drifted lower in trading today after the US dollar found some strength. Australian government bonds closed lower after a mixed session in the U.S. Treasury market on Friday after U.S. November inflation data surprised on the downside. At 0530 GMT, the Aussie dollar was at US$0.7812, down from last weeks close of US$0.7820 late last Friday. The Aussie dollar traded at Y92.25 against the Yen, up from Y92.17. The Aussie dollar currently has an “overhang of speculative long positions and weaker metal prices” posing as negative factors according to Katie Dean, senior economist at the ANZ bank. Australian commodity export earnings in 2006-07 had a downgraded forecast which further cooled demand for the Aussie dollar. The Australian Bureau of Agricultural and Resource Economics said it expects a 13% increase in export earnings in 2006-07, down from an earlier forecast of 14%. The downgraded forecast was attributed to worsening drought conditions across most of the country which are expected to cause farm production drop by 62% in 2006-07. Peter Costello, the Australian Treasurer will release the updated budgetary and economic forecasts for 2006-07 on Wednesday (20th December 2006). Estimates point to a surplus of A$8 billion in the budget. The government had forecast a A$10.8 billion surplus in the May budget.