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AUD/USD closes the week at 1.0560, breaking every record, every resistance line and also gravity on the way. There are many good reasons for a stronger Aussie. Here’s a nice list of 5 major factors. There may be even more. But there are signs that the pair is running out of air. Will we see a big correction?

Australia is doing well. I am usually bullish on the Australian dollar. It’s a relatively predictable currency pair that already passed the Swiss franc in trading volume. And it has at least 5 reasons to rise:

  1. High interest rate: At Even before the rate hikes, Australia had an interest rate of 3%, much higher than the US and also above other Western countries. Standing at 4.75%, the higher yield makes a good candidate for the carry trade.
  2. China: Perhaps China is slowing down, but it still at very high speed. Australia’s main trade partner doesn’t really stop to rest.
  3. Rising commodity prices: Australia’s economy is commodity oriented, and with precious and not so precious metals like copper and iron on the rise, the Aussie is also on the rise.
  4. Low unemployment: It’s not only the wealth of the mining sector, but also other sectors are quite healthy, as the unemployment rate fell to 4.9%. This is very fresh data. Australia was never in a recession during the current crisis.
  5. Steady banking system: There isn’t anything special in Australia’s banking system. That’s good enough, given the troubles in the US and in Europe.

All these factors aren’t new, but they are confirmed over and over again. Great.

There are of course, many reasons why the US dollar is weak.

But wait, isn’t it too much? Since the bottom of 0.97, reached on March 16th (following the Japanese earthquake), AUD/USD rose by almost 9%. In about 3 weeks.

Yes, after breaking out of range, a strong move forward was expected. That’s the meaning of a breakout, and the Aussie usually “behaves” well. The pair traded between 0.98 and 1.0180 for quite some time before the Japanese disaster  – a 380 pip range. You would expect it to find resistance 380 pips higher. That’s exactly 1.0560. Will it mark a top here, at the weekly close?

And finally, we have the CFTC report. Aussie long positions shot up:

Speculators’ net long Aussie position rose to 90,938 contracts, the biggest on record, according to CFTC data.

Is that good for the Aussie that everybody’s long on it? Probably too good. Because when everybody’s long, who’s left to buy? Probably no one.

Extremes in longs or shorts often mark points of reversal. Will we see a significant correction, or will it proceed higher, as usual?

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