Four things about the Australlian dollar

What?

The Australia dollar’s movements against the US dollar were extremely constrained, with the low for the week on Monday 1.0325 and the high 1.0420, on Friday. This was the tightest trading range in the currency pair - 0.95% - since February 2007.

Why?

According to John J. Hardy, Head of FX Strategy, Saxo Bank: “The market is nervously eyeing the US election and the Australian dollar has been pushing up against a big resistance level of just above 1.0400 recently, perhaps reluctant to make any dramatic new moves until the result is known.

What next?

“Australlian dollar will move first off the [economic] data releases [that start on Monday] in Australia, which include trade balance and retail sales data,” said Hardy. “On Tuesday, the Reserve Bank of Australia (RBA) may look to cut the official cash target rate to 3.00% from the current 3.25 per cent, and the country’s employment report is up on Thursday.

“The US election is a critical event for the pair and its next moves will be determined by the market’s reaction to the election’s outcome. The general consensus seems to be that a Romney victory would be worse for risk appetite (and therefore worse for Australlian dollar) than a win by US President Barack Obama. [Republican candidate] Mitt Romney represents an unknown quantity and is supposedly more antagonistic to China and [Federal Reserve Chairman, Ben Bernanke]. But in our estimation, the 1 January fiscal cliff [facing the US] is the bigger worry that will settle in shortly after the election. In this regard, Obama might represent a larger risk [to US dollar upside].”

What to do?

Hardy believes that depending on the outcome of the Australian data and the RBA decision next week, the Australian dollar risks heading lower. Gold prices have corrected and as risk appetite is in danger of crumbling again after the US election as fiscal questions loom, regardless of who wins.

“The big support level that must be taken out is 1.0150 as this is the low of the recent range, but the [Australlian dollar] already looks weak if it trades below 1.0300/1.0250,” said Hardy.