AUD/USD: A fundamental story

After the collapse of last year, the Australian dollar has enjoyed quite the relief rally of late.

This has been on the back of a very strong, historic highs in fact, trade surplus, and hopes inflation in the USA is peaking. This would allow the Federal Reserve to ease up on their aggressive interest rate cycle, thereby providing some respite to the fast expansion of the interest rate differential between the two countries.

On the flip side, the record trade surplus was also due to slowing imports, not a positive indicator for the economy, and even with 50 point rate hikes by the Reserve Bank of Australia that interest rate differential will remain significant.

On the US dollar side of things, we see an economy in serious distress with coming data likely to continue to display this. US consumer confidence may have had a small bounce on Friday, but remains at historic, since the 1950s low levels. This is not a positive currency story. Yet, here too there have been strong gains in exports. A big part of this story being the shift of all available natural gas supplies toward Europe to assist there.

Overall, though, the US is faced with high labour costs, falling productivity and ever higher borrowing costs.

What is interesting here, is that China is already in a long term shift to western style growth rates, permanently, and Europe is about to go into a far deeper recession that the USA. The US also has that, I think mistaken, safe have Monika. The USA is in trouble, but it is not a pretty picture elsewhere either.

The high yield and safe haven status of the US dollar make it still the standout buy among currencies.

Germany is already announcing energy rationing criterion for all heating in all office buildings. The UK and others likely to follow suit as winter approaches. Who wants to be long a low yield energy rationing economic region? The US dollar has likely already resumed its upward march. The Euro is due a small bounce here, but I would remain a seller.

All of this feeds into our Australian dollar outlook. Confronting an again firming US dollar with a yield disadvantage and construction slowing in China. While some bargain hunting buying and hedging by mining companies may have been appropriate recently, this may be about all we will see from the down-under currency.

Some boost on good BHP earning results, where the overall decline of the AUD will have buffered the mining giant from a slowing global economy, may be expected in currency trading, but think 'snowflake in the Australian desert'.

Things are likely to get very tough again for the Aussie battler, and another move lower toward 65 cents this year, 58 next year, are very real possibilities.

Immediately, keep an eye on support at .7065. Below this level spells doom for the Australian dollar.

Welcome assistance to the mining industry facing an uncertain outlook.