The Australian dollar finished the week barely changed against its US namesake, but a surprising shift from the Reserve Bank of Australia and otherwise bullish fundamental developments boosted forecasts for the AUD and sent it to fresh peaks versus the Japanese Yen.
[B]Australian Dollar Continues Winning Streak – When Will it End?[/B]
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[B]Fundamental Outlook for Australian Dollar: Bullish[/B]
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[Reserve Bank of Australia shifts interest rate](http://www.dailyfx.com/story/topheadline/Reserve_Bank_of_Australia_Leaves_1249360288129.html) bias -
[RBA likewise raises growth forecasts](http://www.dailyfx.com/story/special_report/special_reports/Reserve_Bank_of_Australia_Will_1249608684521.html) – but AUDUSD does not respond -
View our monthly [Australian Dollar/US Dollar Forecast](http://www.dailyfx.com/story/currency/aud_fundamentals/AUDUSD__Australian_Dollar_US_Dollar_1249398709140.html)
The Australian dollar finished the week barely changed against its US namesake, but a surprising shift from the Reserve Bank of Australia and otherwise bullish fundamental developments boosted forecasts for the AUD and sent it to fresh peaks versus the Japanese Yen. Australian central bank officials struck a decidedly positive note on the state of the domestic economy, boosting growth forecasts and pointing to improved conditions in domestic activity. They likewise strongly implied that they view current interest rates as sufficient to nurture growth—leaving the door open for rate increases through the foreseeable future. Markets responded in kind, sending implied December, 2009 interest rates to their highest levels since November of last year. Positive surprises in Employment data likewise boosted sentiment, and bullish sentiment pushed the high-yielding Aussie to fresh 10-month peaks against the safe-haven Japanese Yen.
Positive economic developments have boosted forecasts for the Australian currency, but the key question now becomes whether now is the appropriate time to bet on further Aussie strength. It has thus far been the best-performing currency of the G10 on a year-to-date basis, boasting 19 percent appreciation versus the US dollar and 28 percent against the Japanese Yen. Momentum plainly remains in the Aussie currency’s favor as the Australian economy outperforms major global counterparts on commodity market demand. Strong consumption from China has meant that Aussie exports are marginally higher on the year—standing in stark contrast to other countries that have seen record declines in international trade. Unemployment remains low, and domestic housing prices have actually risen on the year. Wave after wave of relative strength in domestic economic data has clearly worked in the Australian Dollar’s favor. Yet it is critical to remember that news and overall sentiment is always the most bullish at the very top in any given market.
We maintain that Australian Dollar sentiment remains at bullish extremes, but it remains especially difficult to call for noteworthy retracements with any sense of conviction. Market sentiment can remain one-sided for extended periods of time—wearing traders’ patience and account balances very thin. This author has found himself on the wrong side of the AUD/USD trade several times now, but with each failure we get closer to the true market top. Will the Aussie finally post a sustained pullback on the very recent US Dollar recovery? It is near-impossible to know for sure, but the CFTC’s Commitment of Traders report shows that speculators remain the most heavily net-long the AUDUSD since it traded above 0.90. Any clear signs of trouble could force a dramatic unwind in positions and a commensurate AUDUSD tumble. - DR