From the November 01, 2010 issue of Futures Magazine • Subscribe!

Aussie: The strongest dollar

The Australian dollar has been riding a wave of dollar weakness and strength in the Chinese economy to record breaking levels, especially since September. While much of the move has been based on fears of what may happen if the U.S. Federal reserve announces a second round of quantitative easing (QE2), other fundamental factors have helped the move.

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Andrew Wilkinson, senior market analyst at Interactive Brokers LLC, says Australia’s location alone has been a boost. "Since Australia largely serves the Pacific region and specifically the Chinese demand for commodities and raw materials, the Australian economy absolutely skipped recession altogether." While the Chinese economy helped bring the Aussie to where it is today, Wilkinson warns traders to watch the U.S. Fed to determine where it will go in the near future. If the dollar strengthens substantially following QE2, watch for the Aussie to drop. "The Aussie is the antithesis of the greenback’s weakness," he says. In the near term, Wilkinson expects the Aussie to trade near parity with the greenback with support at 97¢ and resistance near $1.03.

Eric Viloria, senior currency strategist at Forex.com, concurs that much of the Aussie strength has derived from a combination of the growing Chinese economy and a growing demand for commodities. "China has been demanding a lot of iron ore and Australia has been providing it. They’ve also had good employment numbers over the last couple months, mostly because of strong commodities," he says. Like Wilkinson, Viloria says QE2 is what traders need to watch. "The extent that they do come in with quantitative easing will certainly be looked at because there is a large amount that is already priced into the market. If they disappoint or if the market doesn’t get what it is looking for, we could see a sharp reversal with the dollar strengthening." The Fed is not expected to make any announcements until Nov. 3. Until then, Viloria expects the Aussie to continue trading around parity with the greenback with support around 98.5¢.

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