Aussie’s upstream adventures could be over for now

AUSSIE traders might feel a little like the 19-year-old Australian (pictured right) who tried to use a blow up doll to work his way through the floodwaters last week. It wasn’t so long ago that the Aussie dollar looked certain to be travelling upstream; the Reserve Bank of Australia was sure to raise rates. But now that the floodwaters have come and an area the size of Germany and France combined has been submerged in water, the fate of the currency is less clear.

Wayne Swan, the Australian treasurer, has said that the flooding along the east coast has been the nation’s most expensive natural disaster ever. Some estimates say it will cost £12bn. Damage to the economy is virtually certain. Duncan Higgins of Caxton FX believes this has pared back any chance of an interest rate rise for some time, calling the event a “turnaround in the fortunes of the Australian dollar.” “Our expectation,” he explains, “is that the Australian dollar will remain under pressure in the near term. Given how strong it was by the end of last year, there is certainly plenty of room for the currency to weaken.”

But he adds that market reaction to the devastation might be overdone: “The rise in commodity prices should, to a certain extent, offset the lost volume.” Advising that those with a longer-term view should expect a climb. After all, if the mines get up and running again quickly, Australia’s economy will continue to benefit from the commodities price boom. This should soothe the financial impact of the floods.

But there are bigger concerns for the Aussie dollar in terms of commodities prices. The long-coming Chinese fiscal tightening is – as Michael Hewson of CMC Markets puts it – “not a matter of ‘if’ but ‘when’.” The adjustments will rein in substantial amounts of cash now being spent on Australian commodities. Hewson predicts that the next tightening will come prior to Chinese New Year. The effect are always palpable – and traders should beware. For instance, when the People’s Bank of China raised its reserve requirements last week, mining and commodity stocks fell back on the news, with coal miner Xstrata losing 1.65 per cent and Antofagasta losing 2.4 per cent.

Yet from a technical analysis perspective, David Jones of IG Index says that we don’t have to worry about the Aussie losing value: “It hasn’t really threatened a major low since early December at $0.9530 or the minor low at $0.9750 since 8 December... It doesn’t look too ambitious to expect the uptrend to resume.” And he suspects that only a break below the $0.9530 level would indicate a loss of momentum.

Traders keen to get a steer on the direction of the Australian dollar need to be cautious in the next few weeks. After all, when the water recedes, you don’t want to still feel like the man in the picture: left on dry land with a blow up doll.