Australian Dollar Might Be the Biggest Victim of the Current Financial Crisis

The biggest housing and credit bubble in history, which had its roots in the United States, is now threatening the entire global financial system. However, with the world economy slowing down, export dependent countries like Australia could face the biggest risk of falling into a much sharper recession.

Performance of 10 Major Currencies Against the Australian Dollar (One Month Period)

The Australian dollar has been the worst performer among the world's most heavily traded currencies. However, the key question for the currency trader is whether we will continue to see further losses in the aussie going forward. In fact, a sharp increase in market volatility makes it very difficult to make any type of short term predictions but given the current market environment of uncertainty and de-leveraging in world's financial markets, high yielding currencies are likely to remain particularly vulnerable against lower yielding currencies. Moreover, with the world economy slowing down is reasonable to think that the demand for commodities will also begin to dry up and export dependent countries like Australia and Canada could face a significant risk of falling into a much sharper recession. I have been short AUD/JPY since last week and I expect more Japanese strength going forward.

source: Tradestation

The interest rate heatmap posted below plots the current level of central bank rates against interest rate expectations. Interest rate expectations are very important but difficult to obtain and hard to measure. We suggest to measure interest rate expectations by taking the difference between LIBOR rates with different maturity. The negative slope of the regression clearly shows that countries with high interest rates are expected to cut rates in 2008/2009. Generally, currencies with higher interest rates are more attractive to foreign investors but given the current market environment of de-leveraging in the world's financial markets high yielding currencies are more likely to depreciate because central banks in these countries will be forced to cut rates to promote growth.

DailyFX

Disclaimer

Investment in the currency exchange is highly speculative and should only be done with risk capital. Prices rise and fall and past performance is no assurance of future performance. This website is an information site only. Accordingly we make no warranties or guarantees in respect of the content. The publications herein do not take into account the investment objectives, financial situation or particular needs of any particular person. Investors should obtain individual financial advice based on their own particular circumstances before making an investment decision on the basis of the recommendations in this website. While we try to ensure that all of the information provided on this website is kept up-to-date and accurate we accept no responsibility for any use made of the information provided. All intellectual property rights are the property of Daily FX. Daily FX and its affiliates, will not be held responsible for the reliability or accuracy of the information available on this site. The content herein is provided in good faith and believed to be accurate, however, there are no explicit or implicit warranties of accuracy or timeliness made by Daily FX or its affiliates. The reader agrees not to hold Daily FX or any of its affiliates liable for decisions that are based on information from this website. Daily FX highly recommends that before making a decision, the reader collects several opinions related to the decision and verifies facts from at least several independent sources.