Technical Outlook for the AUD/USD

Tuesday, January 13, 2009

Although many countries across the globe have fallen into recessions, Australia has avoided one. The economy has expanded every quarter since 2000 albeit at an increasingly sluggish pace. In the third quarter of 2008, growth was a paltry 0.1 percent, the weakest in 8 years. There is a decent chance that growth in the fourth quarter was negative and if so it would put Australia at risk of falling into a recession for the first time in 17 years. It may be difficult for Australia to avoid a recession, but any recession in the country should be shallow.

Consumer spending has been neutral to positive every month this year thanks to a steady labor market as the unemployment rate has only ticked up marginally from 4.1 to 4.4 percent. Domestic demand and Chinese demand has made the Australian economy much better equipped to deal with the global slowdown than its peers. Many economists are looking for 2009 GDP growth to be in excess of 1 percent. Although this would be the weakest growth since the recession in the 1990s, we are certain that Australians are grateful that their economy is growing at all. The only significant risk for Australia is a major slowdown in China. China has been the engine of global growth for the past 10 years and unfortunately for world and Australia in particular, that engine has begun to slow.

For the past few years, China has enjoyed double digit growth rates and in 2008, growth is expected to fall to 9.8 percent and in 2009, growth is expected to fall below 7 percent. China has not been immune to the global financial and credit crisis and even though the government has deep pockets, the prospect of more weakness in the real estate market and the pain of sharp losses in the stock market could lead to a further slowdown in consumer spending. Until the global recession is over, many people China could become more conservative with their spending which will undoubtedly have a negative impact on the Australian economy.

In the first half of 2008, the Australian dollar soared within a whisker of parity with the US dollar. However as the prices of commodities plunged, so did the AUD/USD. Having hit a 5 year low of 0.60 in October, the currency pair has been quietly consolidating. It December, it rose out of the Bollinger Band sell zone. Prices are also in the process of breaking the 23.6 percent Fibonacci retracement of the 0.9850-0.60 sell-off. The next level of resistance is at 0.7200, the 20 week SMA and the October / December high. The turn in AUD/USD remains intact as long as the currency pair remains above 65 cents.


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