AUD/USD Monthly Analysis for March 2013

The AUD/USD finished sharply lower in February. The close near the low of the month at 1.1082 puts the Forex pair in a position to resume the downslide in March. Another sign of weakness is the close below a pivot price at 1.0233. If downside momentum continues, traders should look for a break to at least 1.0102.

A test of this level will mean that the October 2012 bottom at 1.0148 has been violated. Breaking through this level will indicate that the minor trend has turned down. This could help lead to increased momentum which may trigger an acceleration to the downside if investors recognize this as a major shorting opportunity.

Fundamentally, a combination of a drop in demand for higher-yielding assets and speculation that the Reserve Bank of Australia is poised to cut interest rates in March are the main reasons for the currency’s weakness. According to Bloomberg, at times during February there was as much as a 33 percent chance of an interest rate cut. Going into March, however, this figure dropped to 20 percent. Although the central bank has an easing bias, the drop from 33 percent to 20 percent suggests that speculators don’t feel there is an urgency to cut rates in March.

According to the latest data from the RBA, the Aussie may be overvalued by as much as 15 percent. On paper this suggests the central bank will take action to put the currency more in line with expectations, but this is not likely going to be the case. In February, Governor Glenn Stevens acknowledged that the currency was “somewhat too high”, but he also added that it would have to be “seriously overvalued” before he’d consider an intervention.

There may be a technical bounce to the upside if the RBA doesn’t cut interest rates in March, but this is likely to be short-lived if demand for higher-yielding assets continues to fall. Downside pressure on global equity markets could help push the Aussie lower. In addition, uncertainty over the U.S. debt ceiling and spending cuts could help drive investors into the safety of the dollar. If the debate becomes prolonged and a compromise between democrats and Republicans cannot be reached in a timely manner then investors are likely to continue to shed higher-risk assets.