The Australian dollar is an important barometer for the resources sector. A lower Australian dollar should mean higher profits for Australian iron ore miners.
In this case, as a resources analyst, I want a lower Australian dollar. I just don’t know if I’ll get it.
It’s a good thing that the Reserve Bank of Australia (RBA) is on my side — it’s been trying to talk down the local currency for months.
But the Australian dollar has remained persistently high this year and is currently trading at around US$0.925. I believe that the recent strength in the Aussie dollar is due to some weakness in the US economy and some improvements in the Australian economy.
Let’s take a look at the technical picture. The chart below tracks the Aussie dollar against the US dollar. Each bar represents one week.
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The most important thing to note is that the major increasing short term trend line (red line) has just broken down. However, significant support remains around the current price level, shown by the blue and yellow lines.
There is a good possibility that the Aussie dollar may consolidate around the current level.
If the Aussie dollar breaks below the blue line at US$0.9205, it’s likely that it could fall to the 90 cent support region (shown by the black line). Although not shown on the chart, this also represents the 50% Fibonacci retracement level — this is an important technical level for chartists because it often acts as a level of resistance.
If the Aussie dollar falls to this level, considering the amount of historical activity around this region, it could stay there for a while. This is where the true art of the 50% Fibonacci retracement level comes into play — an act of psychological resistance for the trade.
In the bigger picture, a break of the US$0.9080 support level will likely extend the medium correction from roughly US$1.10 to a new low. If the Australian dollar rallies above US$0.94, it could head towards the US$1.00 mark again.
So, why is this important?
Fundamentally, Australia is heavily dependent on economic trade for its economic well-being. The terms of trade index is a common measure for this important trend. This index has been falling since 2011, which indicates the economy is receiving less money for its imports.
This is why Assistant Governor of the RBA, Guy Debelle has suggested that the local currency is likely to decline given an overall drop in resource capital inflows into Australian assets.
In addition, capital expenditure should continue falling as Australia’s resources boom changes from an exploration phase to a production phase. Consumer confidence is also falling.
Fundamentally, the Aussie dollar should go lower. And a lower Australian dollar should mean higher profits for Australian resource producing companies with costs in Australia.
Jason Stevenson+
Resources Analyst, Diggers and Drillers
Ed note: The above article is an edited extract from Diggers and Drillers.
