Saturday 31/12/2011 8PM GMT 9PM CET

The Australian Dollar has been the top performing currency we cover over the last few years and its had a great rise but in recent months we have been selling it and made some good profits. We are having another rally now and this looks an excellent longer term level to sell at for a huge decline lower.

Of all the currencies we track, we see the Aussie as having the most potential downside and think, from current levels it could decline by as much as 20% in the coming year. Most people don't agree with us but that's great, most Forex traders lose and don't see big trends until there well in progress.

AUD/USD

The Bigger the Rise the Harder the Fall

We have made good money trading the short side of the Aussie Dollar from 1.080 but we have mounted an impressive rally up to the 1.020 level but we don't see the Aussie staying up here and see a huge fall in the New Year.

The Aussie dollar is already the third most overvalued currency versus the US$ based on OECD estimates (behind the Norwegian Krona and Swiss Franc), the scope for a big break to the downside is in place, as the Aussie dollar bulls ignore several key facts which will drive it lower.

Commodity Prices Down Exports Hit Hard

Australia relies on exports and more specifically commodity exports and this has fuelled a huge rise in the currency but this is all about to end. Between March of 2009 and May of 2011 the CRB commodity index gained 85% and the AUD gained 72%. However, since May commodity prices have declined by 18% and the AUD has fallen less than half of this amount. Commodity prices are going to fall a lot further in 2012 and the Aussie dollar will fall with them.

Internal Growth Down Unemployment on the Rise

While Q3 GDP growth of 1% is impressive compared to most other developed nations, expansion remains focused on investment in raw material extraction and on rebuilding following natural disasters earlier in the year. While growth in resource-rich areas such as Western Australia and Queensland has accelerated other territories have seen none. Recent employment is also getting worse with full-time work having fallen by almost 40K in the latest month and unemployment is on the rise.

China Slowing and a Possible Hard Landing

Australia will be very influenced by events in China and while many point to it continuing to show great growth rates, it won't.

The export markets have dried up, there is no internal demand to pick up the slack and there is to much debt which all points to a hard landing in our view and this can already be seen in the economic numbers such as factory output. Those who say China can stimulate internal demand to pick up the slack are wrong, as there is no middle class of significant size. Chinese economic growth has been built on cheap labour and these workers struggle to live and will not be upping there consumption of consumer goods.

While China's export markets continue to contract and economic activity falls, there are other problems to contend with such as the huge amount of debt on both personal and local Government level. China's days of stellar growth are over for good and will see the Australian economy hit hard.

Comment

The Aussie dollar will be hit hard by the move from risk and the slow in China and the world economy and 1.020 where we are near now looks a great selling opportunity. The bulls may push the Aussie to 1.040 but we doubt it. Watch it tumble through par and down we expect it to decline to 80.00 by the middle of next year.

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