Is The AUD/USD The Next Reserve Currency?

For generations the U.S. dollar has enjoyed the unique status as the world’s reserve currency. Simply because of its massive economy, it was once the measuring stick for all other nations. However since 2008, when the global economy was turned upside down, there have been some doubts as to whether the U.S. can sustain its number one ranking in the currency market.

Looking at a long-term chart of the U.S. dollar, we can see that it has been in a strong downtrend. The global economic problems helped to halt the downtrend in the U.S. dollar; however the selloff could easily regain momentum if the US Federal Reserve cannot control its burgeoning debt ceiling. Investors should pay attention to the key support around 72.75.

In the spring of 2011, investors fled the security of the U.S. dollar because the country was close to reaching its debt ceiling. Although politicians managed to resolve find a short-term solution, economists are expecting the debt problems to be a major issue again in 2013.

Analysts at Raymond James Financial recently warned investors that the government will have to achieve a difficult balance to find the best answer to resolve this issue. “The deficit is a long-term problem and acting too soon to reduce it would hinder the economic recovery, making the deficit problem worse instead of better. As it stands now, the U.S. faces a “fiscal cliff” in 2013,” they wrote in the report. “The nonpartisan Congressional Budget Office estimates that the tax increases and spending cuts that are currently scheduled for next year will reduce the federal budget deficit by 5.1% of GDP in calendar 2013 (the budget deficit is currently expected to be about 7% of GDP in FY12). However, accounting for the (negative) economic feedback, the actual deficit reduction would be smaller than that.”

Investors Paying Attention to Commodity Currencies
With this major ax looming over the U.S. dollar, many investors are looking for ways to diversify and three currencies, The Australian dollar, New Zealand dollar and Canadian dollar are attracting a lot of attention.
The one thing that these currencies have in common is that they are driven by commodity prices. Economists often refer to the Aussie, kiwi and loonie as commodity currencies because their economics are driving by mining, agriculture and oil. All three of these charts have made similar gains in since 2009, which also corresponds with strong gains in oil and gold.

Aussie Dollar Leading the Pack
In 2009 NZD/USD was hovering around $0.50 and is now trading around $0.78. During the same time AUD/USD rallied from around $0.62 and is currently trading around $1.00. The Canadian dollar has also been flirting with parity as USD/CAD has dropped from a high of $1.30 and is now hovering around 1.02.

The only downside to investing in commodity currencies is the fact that they can be extremely volatile. A significant drop in oil prices can cause the Canadian dollar to drop by a penny or more. The same kind of moves in gold can impact the Australian dollar.

Traders also need to be aware of the impact another global recession could have on the commodity prices. One of the reasons why the Canadian dollar has dropped below parity with the U.S. is because oil prices have fallen on expected weak demand.

Growth in China is expected to cool in the next few quarters, which would mean even less demand for crude oil and the price could continue to fall dragging down the loonie. Because gold is acting like a reserve currency itself, the Aussie dollar might hold up a little better as well as the kiwi because the two are closely linked to each other. Although gold has dropped from its highs of around $1,900 an ounce, the price is holding on to good support around $1,500, which is a key long-term support area. If this area holds, the Aussie could continue to outperform other currencies in the medium term.
 
DISCLOSURE AND DISCLAIMER: THE ABOVE IS FOR INFORMATIONAL PURPOSES ONLY AND NOT TO BE CONSTRUED AS SPECIFIC TRADING ADVICE. RESPONSIBILITY FOR TRADE DECISIONS IS SOLELY WITH THE READER.  FOR MORE INFORMATION AS WELL AS UP TO DATE FOREX ANALYSIS VISIT Fx-Insights.

By, David Frank, Chief Market Analyst, AvaFX