Currencies reflect the relative strength or weakness of a country’s economy.
Over the past three years, as Australia dodged the global slowdown by feeding China’s appetite for resources, the Australian dollar clearly mirrored the country’s strong economy.
The Aussie dollar’s value nearly doubled against the U.S. dollar from late 2008 to 2011.
But 2012 has been a shaky year for the dollar from down under, which has bounced up and down… but ultimately gone only sideways.
I think the Australian dollar is due for a significant correction. A quick glance at Fibonacci levels helps me determine just how far the Australian dollar is likely to fall.
Significant pullbacks typically retrace between 50% and 61.8% of the primary trend, according to Fibonacci analysis.
The rally began when it cost just $0.60 to buy one Australian dollar, and ended when one Aussie dollar was worth $1.10.
The white circle above shows the most likely target for a declining Australian dollar, between $0.80 and $0.85.
This trend will likely take several months to unfold on its own. Unless, of course, a global crisis triggers another sudden sell-off as we saw in late 2008.
We’ll keep an eye on this currency as it is a useful gauge of China’s slowdown and Australia’s vulnerability to a major property market bust.
If you haven’t done so already read the Survive & Prosper issue on “The Decline in Australia Property Value.”