Aussie (AUD) Approaches Parity On Euro Debt Crisis!
There is no greater proxy for risk in the forex market than the Australian dollar (AUD) as the interest offered in Australia and its liquidity make it desirable for carry trades. Recent selling in the Aussie vs. USD has pushed it lower to just above parity with USD as the risk emanating from the Euro debt crisis has the markets on edge.
As you can see from the chart below, the Aussie is sitting just above the 50% Fibonacci retracement level on the pull back and this is a critical level as a major breach and close beneath that level could mean additional selling down to the .975 level.
This would coincide with greater risk in the Euro zone as bond yields continue to rise with no credible plan to halt this action. This makes debt financing more expensive for the Euro zone which makes it ultimately harder for them to service their debt.
While I am not advocating a short position on the Aussie, I think the psychological support at parity will hold in the near-term with the potential to bounce higher to 102.50. Not to mention the considerable cost (negative interest carry) that is implied by shorting a high yielding currency. Of course if problems persist in the EU, look out below!