AUD-USD forecast

AUD-USD Research Report
Date 1/19/2014

Big Picture for the AUD
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The Australian economy is faltering.  The RBA was trying to establish 3.0% as its benchmark cash rate, but it had to drop it to 2.75% in May 2013 and 2.5% in August, the lowest in history.  It will probably be dropped another 25 basis points in March.

Australia's economy has largely been based on mining and commodities, but those industries are hurt by lower commodity prices and demand.  It depends heavily on China, which is slowing down its growth.  China no longer needs unlimited amounts of iron ore, copper and coal.  Australia is trying to diversify its economy, but its non-mining economy is not growing fast enough to offset the decline in the mining economy.

Australia has very high real estate prices and may be in a bubble which is about to pop.  The average home price in Sydney increased more than 13% in 2013 to more than A$700,00.  Many suburbs of Sydney now have median prices above A$1 million. Average household debt as a percent of annual income is almost 150%, compared with 135% in the US. (http://www.bloomberg.com/news/2013-11-05/bubble-trouble-seen-brewing-in-australia-home-prices-mortgages.html). The lowered interest rates contributed to the high real estate prices, but now houses are very unaffordable and are near their peak even if interest rates drop even further.

The Great Recession of 2008-2009 never really affected Australia.  It grew 2% in 2009 (while other countries were in a severe recession) because of its proximity to the booming Chinese economy and the related mining boom. Australia hasn't had a real estate crash (i.e. prices dropping by more than 10% in one year) in more than 40 years.  The next recession will hit Australia hard.

In a panic, the Australian dollar can drop like a rock.  It dropped 40% over a 3 month period in 2008.  This helped their economy in AUD terms because it made them more competitive.  But this fact doesn't help foreigners invested in AUD.

So obviously, none of this is helpful to the AUD.  But here is the flip side of the argument.  The AUD has already dropped about 16.4% over the last year.  The weaker AUD helps their economy.  And the charts look like a double bottom is in place. Another fact is that the AUD tracks the price of gold, with about a 1 month delay.  And the bottom for gold is in and gold is starting to go higher.  However, the price of gold isn't forecast to rise very much in 2014.

My conclusion is that the AUD is likely to drop further against the dollar, but it is near the bottom. The most likely level in 30 days would be near the bottom first reached on Aug 1, 2013 and then again on Dec 19.  Say about 0.8850.

For a 1 year forecast, the AUD will also probably be close to where it is today, in the 0.88 to 0.89 range.  However, if the RBA cuts the cash rate to 2.25% it will drop even lower, maybe down to 0.85.

Update:  The AUD won't necessarily rise if the price of gold does.  So look for a modest (3%) drop in AUD. Which would put it at about 0.8650 on 12/31, and if the cash rate is dropped again, down to 0.8300.

Short-Term Forecast
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The AUD closed on 1/17/14 at 0.8778.  On 1/1/14 it was at 0.8915.  There is support at 0.8728 and resistance at 0.8893.  I think in the short run the trend will be flat or down slightly, so it is probably safer betting on a small downward slide.  So short the AUD by selling it at 0.8880 and buying at 0.8740, a band of 140 pips.  Or the reverse, although you would want to sell at a lower level, like 0.8850.