Australian Dollar Hits 6-Month High…Can It’s Rally Continue?

The Aussie has been rallying strong of late, and this recent strength is now also underpinned by yesterday’s decision by the RBA (Reserve Bank of Australia) to hold interest rates at 3% for at least the near term.  The positive rate differential for the Aussie compared with the US Dollar and Japanese Yen should be a bullish fundamental factor going forward.

Also in Australia’s favor is the renewed strength in the Chinese economy, and commodity prices at large.  A continuation of these trends should help the Aussie’s rally continue, since the Austrailian economy is largely commodity driven.

We can also credit some of the recent strength to the rally in world equity markets.  With markets rallying, risk aversion appears to be creeping back into play, as investors and traders are once again loading up on high yielding currencies.

Finally it’s important to note that Australia is one of the lone major economies not to yet engage in quantitative easing – also known as “money printing.”  The US, UK, Japan, and Switzerland have all turned to QE.  As strange as this may sound, a steady supply of money is usually bullish for a currency, especially when priced against others that are being printed at full speed and dropped from helicopters.

Potential roadblocks for the Australian dollar?  A downturn in the markets – which is a real risk, given this is likely a bear market rally – could once again dampen investors’ risk appetite and prompt them to sell the “higher risk” currencies and flea back to that beacon of safety and fiscal responsibility, the US dollar. 

All in all, I weighed the risk/reward factors last night, and decided to go long 1 Australian dollar contract.  I am long-term bullish on the currency, and the recent breakout was enough of a technical indicator for me to take the leap.

• Buy the ETF FXA, which tracks it’s price
• Open up a CD with EverBank denominated in Australian dollars