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Aussie trades at nearly 8-month lows as sell-off intensifies

H.S. Borji
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Aussie trades at nearly 8-month lows as sell-off intensifies

The Australian dollar was back on the defensive Tuesday, falling to a nearly eight-month low against its US counterpart despite stronger than forecast Chinese manufacturing data.

The Aussie tumbled to an intraday low of 0.8834 US. The AUDUSD exchange rate would subsequently consolidate at 0.8850, declining 0.24 percent. The pair is likely supported at 0.8833. Initial resistance is ascending at 0.8932.

The Australian dollar has given up 1.3 percent to the US dollar the past five days and nearly 6 percent over the past three months in what is likely to be viewed as a welcomed development by the Reserve Bank of Australia.

The RBA, which has kept its interest rate target at a record low of 2.5 percent for 13 consecutive months, is running out of ideas to inspire the economy. Central bankers are seeking a “period of stability” to help Australia’s fledgling economy transition from a slowdown in mining investment. Record-low interest rates, it is hoped, will help the country achieve balanced growth over the medium term.

A weaker local currency will also help rev up the tourism, manufacturing and education industries, which are highly sensitive to the exchange rate. The RBA has long maintained the Australian dollar is over-valued and is due for a broad correction. In July RBA Governor Glenn Stevens said the local currency was overvalued by “not just a few cents.”

Fair market value for the Aussie is believed to be around 85 US cents, given the weakness in commodity prices.

The value of iron ore tumbled on Monday after failing to sustain a modest recovery the previous week. Iron ore, which is a staple of Western Australia’s economy, declined 2.3 percent to $79.80 a tonne, the lowest price since September 2009.

Analysts at Goldman Sachs have dubbed 2014 “the end of the Iron Age,” which could serve as a major blow to Western Australia’s economy.

The AUDUSD continued to trend lower in North America after reaching an intraday high of 0.8926, which was inspired by stronger than forecast Chinese manufacturing data.

Manufacturing activity in the world’s second largest economy expanded in September, as output growth increased at a moderate pace, HSBC’s flash China manufacturing PMI showed.

The PMI reading of 50.5 was 0.3 percentage points higher than the final August reading, and suggests China’s manufacturing sector was in expansion mode. Economists forecast a reading of 50, which separates contraction from expansion in total manufacturing output.

However, HSBC chief economist Hongbin Qu described the September reading as “mixed,” as the downturn in residential real estate continues to post “the biggest downside risk to growth.”

The Australian currency is highly sensitive to economic developments in China, the country’s largest and most influential trading partner.

Australia had no economic data to report on Tuesday. The Reserve Bank of Australia will issue its Financial Stability Review on Wednesday, which provides an assessment of the country’s financial system.

Separately, the Conference Board will issue its leading indicator for July, which measures future trends in the Australian economy.

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