Australian Currency Band Forecast and Performance - Basic Trading

October 7, 2012

Australian currency band are moving forward from their equilibrium to disequilibrium trading zones and represents the most consistent and strongest performance in the market. The AUD-positive pairs consistently to move to downward direction and by opposite the AUD-negative pairs consistently to move to upward direction – by ignoring the newly enforced Dodd Franc Act in Washington, DC for policy makers.

Australian-pegged derivatives continue to spur while the major pair to move behind the derivatives. AUD/CAD already broken the previous lower currency band (1.000) together with AUD/NZD (1.2500) and will continue to move to downward direction. AUD/CHF will also break the previous lower currency band (0.9400). Both the negative pairs, EUR/AUD and GBP/AUD already near their previous upper currency bands (1.2800 and 1.5900) and will continue to move to upward direction.

Following the RBA rate cutting on October 2, 2012 as forecasted, the both AUD/USD and AUD/JPY moved to downward direction to follow other AUD-positive pairs and both presently defended at their central currency bands (1.0100 and 79.50). These pairs however will continue to move to downward direction by breaking their central currency bands down to their lower currency bands (previously 0.9650 and 75.50) and leaving these two pairs remains attractive to short to target the remainder disequilibrium trading zone but at very high swab costs (overnight rollover fee).

How high the EUR/AUD and GBP/AUD will move to upward direction and how low AUD/CAD, AUD/NZD, AUD/CHF as well as AUD/USD and AUD/JPY could be measured when the lowest ATWR for AUD-positive pairs equals to the measured the highest ATWR for AUD-negative pairs, and represent their equilibrium exchange rate (EERs) as well as the turning points and market entry decision making tools to long AUD-positive pairs and at the same time to short AUD-negative pairs.

The current performance of Australian currency band is indicating for RBA not to cut the rate further so long USD and JPY-based fund managers continue to liquidate their holding positions from AUD currency and AUD-denominated interest bearing securities to avoid possible excessive capital outflow that may impact the Australian economic dynamic stochastic general equilibrium. RBA’s minute of meeting stated that “Interest rates for borrowers have for some months been a little below their medium-term averages. There are tentative signs of this starting to have some of the expected effects, though the impact of monetary policy changes takes some time to work through the economy. However, credit growth has softened of late and the exchange rate has remained higher than might have been expected, given the observed decline in export prices and the weaker global outlook”. It is appropriate for RBA to hold the rate and to look further on the performance of AUD/USD and AUD/JPY.

RBA however may need to cut the interest rate for another 0.25 % during the next meeting during the time AUD-positive pairs to move to upward direction and the AUD-negative pairs to move to downward direction to slower the AUD appreciation by the major currencies to maintain the Australian economic equilibrium internal rate of return and keeping the capital inflow at slower mobility to keep inflationary pressure remains at band.

So far, Australian currency band is moving forward inline to global equilibrium expectation by allowing the capital inflow and outflow to move in harmony and meeting the central bankers and largest market players’ expectation.