As I write this article (on Wednesday morning, August 3rd), US President Barack Obama has signed off on an agreement to extend the credit limit and ensure the United States does not default on any of their obligations – for now.

A US default would have been catastrophic for financial markets but the US looks to have dodged that bullet, at least in the short-term.

What does this mean for the Australian Dollar?

Historically, the Australian Dollar has been seen as comparatively risky and has been sold off heavily during times of financial uncertainty and panic. In 2008, the Australian Dollar was approaching parity with the US, reaching 0.9849 before falling to 0.6009 in just over three months, as illustrated in Chart 1 below:

Chart 1

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click to enlarge

Will we see this sort of sell off from the current high of 1.1080, reached on 27th July, 2011?

Certainly, after a 300-point drop back to 1.0770 and the decision by the Reserve Bank not to raise interest rates, there is an argument that we may see the Aussie Dollar fall away from these highs.

However, given the relative states of the US and Australian economies plus the substantially higher interest rate return on offer in Australian Dollar investing, I predict more upside in the medium to long term for this currency pair.

The test for the Australian Dollar will come in the next two weeks.

If the Aussie Dollar is trading above $US1.10 in mid-August, we could see a rapid rise in this currency, with $US1.30 well within range by Christmas.

First, the Australian Dollar will need to find some support. In Chart 2 below, we can see that a simple trend line from the March, 2011 low has been supporting the Aussie Dollar.

Chart 2

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click to enlarge

We also have a 50% retracement of the current up move coming in at 1.0730, as shown in Chart 3 below:

Chart 3

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It looks like we have a big couple of weeks coming up. As always, follow your rules, stick to your trading plan and manage your risk.

Be Prepared!

Mathew Barnes