The following a direct quote from Glenn Robert Stevens – an Australian economist and the current Governor of the Reserve Bank of Australia.
“The foreign exchange market is perhaps another area in which investors should take care.
While the direction of the exchange rate’s response to some recent events might be understandable, that was from levels that were already unusually high.
These levels of the exchange rate are not supported by Australia’s relative levels of costs and productivity. Moreover, the terms of trade are likely to fall, not rise, from here. So it seems quite likely that at some point in the future the Australian dollar will be materially lower than it is today. “
Boom!
You’ve got to love it when a central banker:
- Tells the absolute truth.
- Tells the absolute truth.
- Tells the absolute truth.
Short AUD has been ” and will continue to be” an absolutely fantastic trade moving forward, as perhaps “finally” we get the correlation to “global appetite for risk” back in vouge.
Why the Australian Dollar’s Downtrend Is Just Getting Started
Commodity Currency Fundamentals Are Cracking
Stevens isn’t just talking his book here – he’s acknowledging what every serious forex trader should have seen coming from miles away. The Australian dollar’s classification as a commodity currency has been both its blessing and its curse. When China was gorging on iron ore and coal during its infrastructure boom, AUD/USD rode that wave all the way past parity. But here’s the reality check: those days are done.
Iron ore prices have been getting hammered, and copper – another key Australian export – continues to show weakness despite occasional dead cat bounces. The writing is on the wall for anyone paying attention to the Baltic Dry Index and Chinese manufacturing data. Australia’s terms of trade peaked years ago, and Stevens is finally admitting what the charts have been screaming: this currency is structurally overvalued and heading south.
The correlation between AUD and commodity prices isn’t some academic theory – it’s cold, hard trading reality. When you see copper futures breaking support levels and iron ore inventories building up in Chinese ports, you don’t need a PhD in economics to figure out where AUD is headed next.
Risk-On/Risk-Off Dynamics Are Shifting
For years, the Australian dollar has been the poster child for risk appetite. When global markets were feeling optimistic, money flowed into AUD. When fear crept in, it flowed right back out. But here’s what’s changing: the fundamental drivers of global risk sentiment are shifting away from Australia’s favor.
The Federal Reserve’s monetary policy divergence is creating a massive tailwind for USD strength, while the Reserve Bank of Australia is stuck in an easing cycle. This isn’t just about interest rate differentials – though those matter plenty. It’s about capital flows and where smart money wants to park itself when uncertainty rises.
European markets remain fragile, Chinese growth continues decelerating, and emerging markets are showing cracks. In this environment, AUD stops being a safe haven for risk-seeking capital and starts looking like exactly what it is: an overvalued currency tied to a resource-dependent economy facing structural headwinds.
Technical Picture Confirms the Fundamental Story
The beauty of Stevens’ comments is they align perfectly with what technical analysis has been suggesting for months. AUD/USD has been making lower highs and lower lows, breaking through key support levels that held during previous selloffs. The weekly charts show a clear bearish pattern that typically precedes major currency adjustments.
More importantly, cross-pairs are telling the same story. AUD/JPY has been particularly weak, which makes sense given Japan’s monetary easing stance should theoretically weaken the yen. When AUD can’t even hold its ground against a currency being deliberately devalued, you know something fundamental has shifted.
The 200-week moving average on AUD/USD sits well below current levels, and every bounce has been getting sold aggressively. Professional traders recognize distribution patterns when they see them, and AUD has been showing classic signs of institutional selling for months.
Trading the AUD Downtrend: Practical Execution
Stevens has essentially given forex traders a roadmap for one of the most obvious trades in the market. Shorting AUD against USD remains the cleanest play, but don’t ignore opportunities in other pairs. AUD/CAD offers interesting dynamics given both currencies’ commodity exposure but Canada’s superior energy resources and North American proximity.
For swing traders, waiting for technical bounces to short into has been profitable and should continue working. The key is recognizing that any strength in AUD is likely temporary and driven by short covering rather than genuine buying interest. Risk management remains crucial – central bank intervention is always possible, though Stevens’ comments suggest the RBA isn’t particularly interested in defending current levels.
Position sizing should reflect the high-probability nature of this trade while respecting the reality that currency moves can be volatile in the short term. The monthly and weekly charts suggest this downtrend has significant room to run, making AUD shorts one of the most compelling medium-term trades in the forex market right now.
Absolutely right Kong – short from 0.9725 and again at 0.9629. The AUD has responded to the comments down 35 pips and sits on top of the daily 20ema and the 23.6 fib of the move 0.8848/0.9757. If it breaks there is still plenty of support on the way down, but for me target 1 is the 38.2 fib at 0.9410. I suggest to go much further than that it will need a new risk aversion trigger.
Looks like a reversal on the AUDNZD as well.
Nice work Deano – as always.
I’m looking at things ” a touch longer term” in that…..AUD vs USD has “swung high” on a weekly chart so……..
My longer term view would have it that trades entered “around here” / or perhaps on any push higher…might just stick for ” a real turn” taking out lows around 89.00
I know……everyone is convinced the Fed will save the day etc…..I’m not on that train.
Food for thought mate.
No agree entirely Kong. The ring high is good for a few hundred pips and my system is also giving me a turnover signal so its only going one way. I’m just cautious that progress may be slow and choppy given the lack of a true risk off driver, so intend to take profits as it goes. We just need one good blowup to clean up! Perhaps the Chinese and Japanese can take a few pot shots at each other – nothing too serious but enough to bump up the volatility 🙂
Reading my mind Deano as I too ponder what may come of the “potencial conflict” over those islands.
I’m very cautious here too, but do really like the way things are “finally” coming together???
Looks like the China is weary of the massive influx of hot money into their economy, unlike the rest of the world still thinking that QE gonna save the world.