Here’s Why the Australian Dollar Could Soar in 2016
The AUD to USD exchange rate could be setting up to soar, so don’t be shocked if the Australian dollar is one of the best-performing among a basket of major world currencies.
There are three factors that suggest the AUD/USD pair could see a solid move to the upside: technical analysis, solid economic developments in Australia, and the U.S. economy facing some expected headwinds ahead.
Technical Analysis: AUD to USD Breaking Above Downtrend
Remember that when it comes to the currency markets, trends remain in place for a long time. Certain extreme levels, both lows and highs, are looked at with extreme caution. With this said, please look at the chart of the AUD/USD pair below and pay close attention to the red trendline.
Chart courtesy of www.StockCharts.com
Notice something interesting? Since August of 2014, the AUD to USD pair has been trading downward, but just recently, it broke above the downtrend. This shouldn’t go unnoticed whatsoever; it’s a bullish move.
Please also take a look at the following very long-term chart of Australian dollar to U.S. dollar pair and pay close attention to the circled areas; they show something very interesting.
Chart courtesy of www.StockCharts.com
Since the mid-80s, the range between $0.65 and $0.70 on the AUD/USD pair has acted as a strong support level. This pair is closing in on this range, so we could see some buying activity as a result.
But this technical analysis isn’t the only sign suggesting the AUD to USD pair is setting up to reward. Pay attention to Australia’s economy, as well.
Australia’s Economy Showing Resilience
Over the past year, there has been a significant amount of fear that the Australian economy will be negatively affected by the slowdown in the Chinese economy. Australia is a resource-focused economy and has been/is doing a significant amount of trade with China, after all.
You see, just recently, we saw solid jobs figures out of Australia, with employment increasing by 71,400 in November. (Source: “Labour Force, Australia, Nov 2015,” Australian Bureau of Statistics, last accessed December 10, 2015.) This was one of the biggest increases in the jobs market since 2013 and the figure was well above what was anticipated (a loss of 10,000 jobs). Additionally, the unemployment rate in Australia, between October and November, declined from 5.9% to 5.8%.
Other economic indicators suggest the Australian economy is doing just fine, too, which is great for the AUD/USD pair.
U.S. Economy to Face Headwinds, Thanks to Federal Reserve?
The U.S. economy, on the other hand, isn’t expected to perform well in 2016.
Yes, over the last year, the U.S. dollar has soared on the basis that the Federal Reserve will raise interest rates. We will find out next week if this is actually going to happen in 2015, but you have to keep the big picture in mind. The federal funds rate is expected to go from 0.25% to 0.50%. Prior to the financial crisis, these rates were close to five percent, so the move won’t be that significant.
Mind you, one must ask also if the Federal Reserve can take interest rates to the levels they were at back in 2006? If you look closely, this move would impact a lot factors, such as consumption, housing, bonds, and stocks, just to name a few. Once and if the Federal Reserve raises rates, don’t be shocked to see the U.S. economy face a slowdown. It’s really possible and we are already seeing troubling signs.
The AUD/USD Outlook for 2016
The AUD to USD pair could provide solid gains in 2016, since as it stands, all the stars appear to be lining up perfectly.
However, there are a few risks that investors must keep in mind. Keeping a close eye on what Australia’s central bank does could be one such critical risk. We have seen the Reserve Bank of Australia lower its benchmark rates in the recent past; more of the same could follow, which could impact the direction of the currency pair.