After posting a new all-time high in July, the AUD USD proceeded to sell-off sharply during August. Although the main uptrend remains intact, the size of the break brought attention to the fact that despite the strong uptrend, this currency pair can sell off quickly should global economic conditions warrant a risk off scenario.
Besides a flight to the safety to the U.S. Dollar, the Aussie remains vulnerable to a softer interest rate policy by the Reserve Bank ofAustralia. The main reasons for the sell-off in the Australian Dollar during August were the continuing debt crisis in Europe, the debt ceiling debate in theU.S.and theU.S.debt rating cut by the S&P Corp.
Setting aside all of those factors, the fact remains that Australian interest rates are higher thanU.S.rates. Since money seeks the highest yield, funds should continue to flow intoAustralia, driving up the AUD USD. Throughout the latter half of August, traders were holding the Aussie steady on the thought that the RBA may lower interest rates at its next meeting in September. On Friday August 26, RBA governor Glenn Stevens assured the market that interest rates would not be cut. This helped boost the Aussie.
Also on August 26, U.S. Fed Chairman Ben Bernanke hinted at additional stimulus while assuring investors that theU.S.economy would recover from its sluggishness. This helped trigger increased demand for risk, driving up the Aussie into the end of the month.
Expectations are for the AUD USD to continue to work its way higher in September as long as the RBA leaves rates unchanged or hints at further increases. In addition, as long as demand for higher yielding assets persists, the Australian Dollar should benefit. Because of the size of the sell-off in August, investors are likely to be a little more cautious as the market approaches the 1.0800 to 1.1000 area.
Technically, the AUD USD is in an uptrend on the monthly chart. Last month’s sharp break through an uptrending Gann angle did nothing but take out stops. The market has now regained this Gann angle, placing the Aussie inside of Channel Up. The upper level of the channel is 1.1608 and the lower level is 1.0627.
It is highly unlikely that the Aussie will reach the upper level of the channel, however, it is likely to straddle the lower level several times. This will make 1.0627 an important pivot that will control the direction of the market throughout the month. Holding above it will create a bullish tone while breaking below it is likely to conger up memories of the sharp break in August.
In August the AUD USD closed at 1.0706. This put the Aussie down .0286 or -2.67%.