A Few Reasons Why the AUD/USD Exchange Rate Could Soar in 2016
The AUD to USD exchange rate is down roughly one percent year-to-date. Don’t be shocked if the Australian dollar turns out to be the best-performing currency in 2016.
The AUD/USD exchange rate had it rough in the first two weeks of 2016, Since then, we have seen some strength build up. Please look at the chart below:
Chart courtesy of www.StockCharts.com
The currency pair now trades above its 50-day moving average (MA). This suggests that the short-term trend is turning in favor of bullish investors. Note that since the bottom in mid-January, the AUD to USD is up more than five percent. This is impressive. When losses are wiped out this quickly, it means there is a large number of buyers present.
But you have to look beyond this. Pay attention to the fundamentals. A currency appreciates when economic conditions improve. In Australia, we see that happening.
You see, in 2015, there was fear that as the Chinese economy slowed down, the Australian economy would face headwinds. As a result, investors sold the AUD to USD pair. And they were right. The Australian economy did come under scrutiny.
Now, we see light at the end of the tunnel.
For economic growth, one thing is very important: capital expenditure or, for the lack of better words, spending by businesses. When businesses spend money, they create jobs. Ultimately, this induces consumption.
With this in mind, for the quarter ending December 31, 2015, the total new capital expenditure in the country was registered at AU$31.94 billion. This was 0.8% higher than the previous quarter. Spending on building and structures improved by 1.2% and on equipment, plant, and machinery, spending increased by 0.1%. (Source: “Private New Capital Expenditure and Expected Expenditure,” Australian Bureau of Statistics, February 25, 2016.)
Unemployment is another indicator that reflects the health of an economy. In January, Australia’s unemployment rate stood at six percent—it’s down from the same period a year ago. On an interesting note, between January of 2015 and January of 2016, the number of unemployed in the Australian economy declined by 2.8%. (Source: “Labour Force,” Australian Bureau of Statistics, February 18, 2016.)
If you pay attention to the U.S. economy, there isn’t much working for it. In fact, the risk of a recession in the country is mounting higher by the day. My colleague John Whitefoot explained why here: “This Is Why We’re Heading for a Recession.”
AUD to USD Outlook for 2016
I know my take on the AUD/USD pair isn’t so “mainstream.”
I believe 2015 was the worst year for the AUD to USD exchange rate. I agree that some of the pessimism against the Australian dollar was valid, but investors took it too low. After a rocky start to 2016, the currency pair is moving higher. I expect it to move much higher from here.
I hate calling exact price targets, but here’s something investors should keep in mind: The AUD/USD currently trades near a support level that has been tested several times since the early ’90s. The last time this level was tested was in 2009. After that, we saw the AUD to USD pair move roughly 60% higher.