Monday, May 20, 2013

Australian Dollar ETF Breaks Key Support Level

Three reasons why this might be a more permanent move:

One is the weakness in commodity prices. Iron ore, Australia’s most valuable commodity export, slipped into bear market territory last week amid concerns about slowing economic growth in China.

“Iron ore is down 20 per cent from the highs in February and coking coal has seen similar price action,” notes Robert Rennie, global currency strategist at Westpac.

A second is the slowdown in foreign direct investment as large resources companies slash spending on new projects and expansion in Australia.

The recent reduction in the RBA’s benchmark rate to 2.75 per cent has also eroded the attractiveness of the Aussie by narrowing the interest rate differential with the US, where rates are effectively zero. Many economists believe the RBA will be forced to lower rates again to help rebalance the economy as the resources investment boom peaks.