Facts about the Australian dollar
The Australian dollar, or AUD, is a significant currency in the global economy. It is the official currency of Australia and is widely traded on the foreign exchange market. Understanding the AUD and its seasonal patterns is crucial for investors, traders, and businesses.
Another critical consideration is that the Australian fiscal first quarter ends on September 30, and the AUD has a historical pattern of declining into this period. The AUD's performance in the fiscal first quarter is closely watched as it provides valuable insights into the country's economic health and impact on global trade. We will delve into this pattern later in the article. It's important to note that seasonal patterns may not always hold, as many variables influence currency markets. Therefore, conducting thorough research, analyzing market trends, and considering multiple factors when trading the AUD during a seasonal window is essential.
Australia is known for its rich natural resources, particularly mining and agriculture. Therefore, commodity prices, such as iron ore, coal, and gold, significantly impact the Australian dollar. The Australian dollar strengthens when global demand for these commodities is high. Conversely, when commodity prices decline, the Australian dollar may weaken. The AUD saw a steady decline in August as its largest trading partner, China, continued to show a weakening economy.
Interest rates also play a crucial role in determining the value of the Australian dollar. Higher interest rates attract foreign investors seeking better investment returns, increasing demand for the currency and consequently strengthening its value. Conversely, lower interest rates can lead to a decrease in demand for the currency, causing it to weaken. As the United States (US) economy continues to show signs of a slowing economy, the Federal Reserve Board (FED) will likely be nearer than further from ending its interest rate hikes. The European Central Bank (ECB) is in a similar situation, and now the Reserve Bank of Australia (RBA) is set to follow suit at the upcoming meeting in September by leaving rates at 4.1%.
Technicals for the AUD
Source: Barchart
The technicals remain bearish for the AUD as the daily chart illustrates recent weakness during August. The AUD peaked in January 2023 and spent several months in a sideways pattern. As the fiscal first quarter began in July, the market exhibited its seasonal weakness that usually goes into the end of September, the end of the fiscal first quarter.
In a recent article for Barchart, "Stop Wasting Time and Start Comprehending the Australian Dollars Seasonal Trading Pattern in August," I described a seasonal sell setup that performed well.
Source: Moore Research Center, Inc. (MRCI)
MRCI research had identified a seasonal pattern of selling the AUD during early August and repurchasing it in the latter part of the month. The yellow box highlights the results of that trade.
The AUD's seasonal selling pressure continues into the end of September. The market may need a relief rally before beginning the final leg to the end of September.
Will global economies experiencing slowdowns due to the extended Central Banks interest rate hikes leading to lower commodity demand continue supporting the AUD's seasonal weakness?
The Commitment of Traders (COT) Report
Source: CMEGroup Exchange
During the July through August price decline (yellow line), the non-reportable (smaller traders) positions (red bars) surged with new short positions as prices declined. After the non-reportable traders loaded up on shorts, the AUD found a bottom on August 17 and steadily climbed, leading to the relief rally.
Will this relief rally carry the AUD to a higher level for a better position to short the market for the upcoming seasonal short into the end of September?
Seasonal Pattern
Source: Moore Research Center, Inc. (MRCI)
Reviewing the last 15 years of AUD activity, MRCI research has found, after a brief consolidation of the August decline, that approximately the second week of September sees the price decline begin that lasts into the end of the month and early October.
As US traders return from the long Labor Day weekend holiday on September 5, they may focus on this sell pattern for a market opportunity. To participate in this setup, traders can utilize the spot forex market AUDUSD. Futures traders can use the standard-size (6A) contract (Barchart symbol A6) or the micro-size (M6A) contract (Barchart MG.)
In Closing
In conclusion, understanding the seasonal trading patterns involving August and September prices can provide valuable insights for navigating the AUD effectively. By employing strategies such as monitoring economic indicators, utilizing technical analysis tools, implementing risk management techniques, and diversifying your trading portfolio, you can position yourself for potential success in the forex market during the anticipated September AUD decline. Remember to stay informed, adapt to changing market conditions, and prioritize risk management for a well-rounded trading approach.
On the date of publication, Don Dawson did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
