Aussie Dollar Buckles

Currencies reflect the relative strength or weakness of a country’s economy.

When global markets rebounded in early 2009, Australia’s dominance was evident. The resource-rich nation had dodged the worst of the slowdown by feeding China’s voracious appetite for coal, iron and the like.

The Australian dollar clearly mirrored the country’s strong economy, nearly doubling in value, relative to the U.S. dollar, from late 2008 to mid-2011.

But 2012 was a shaky year for the Aussie, which mainly bobbed up and down with no clear trend. This prompted me to write about the currency last September.

I shared a chart, highlighting the “toppy” wedge patternrn (in blue) and showing a likely drop to as low as $0.80 (one Aussie dollar = $0.80 U.S. dollars), which I had marked with a white circle.

Now here’s an update on this chart. The pink bars show trading after I wrote about the pending drop last year:

See larger image

As you can see, the Aussie dollar has dropped substantially since last September. We haven’t quite made it to my downside target of $0.80 yet, but we’re close.

I think we could see the currency hit that target by year’s end.

This, along with the trend of declining values in emerging-market currencies, adds further weight to our bullish-dollar thesis.

Watch for this trend to intensify over the next few months. With the U.S. dollar near its trading-range lows, now’s a good time to get in.