Hot rates

Wondering what the most active and interesting forex rates to trade right now are?

Currency Trader asked three analysts for their top cross rates heading into the New Year and they chose AUD/JPY, AUD/USD, and USD/CAD.

According to Brian Dolan, director of research at Gain Capital, action in the AUD/JPY could prove interesting over the next several months. While AUD/JPY had, as of mid-November, pushed to its highest level (around 81.75) since March 2004, Dolan highlights a number of fundamental and technical factors that could make that trend switch gears. Generally, Dolan favors selling the Australian dollar vs. the yen.

While fundamental factors are positive for both of these currencies, Dolan believes the yen is more likely to appreciate amid “potential for revaluation of the Asian currencies,” which would allow the yen to strengthen, he says. While many Asian countries, notably China, have been able to artificially keep their currency levels relatively weak despite robust growth, “the next major shift will likely see these currencies appreciate,” Dolan says. Any strengthening of the Chinese currency would probably spill over to the yen.

A second factor likely to support a retreat in the AUD/JPY rate over the next several months is a decline in “uridashi” issuance, Dolan speculates.

Uridashi refers to non-yen fixed income instruments sold to Japanese investors. Uridashi denominated in Australian dollars have been a popular choice among Japanese investors, simply because of higher Aussie interest rates. However, “uridashi issuance peaked in 2003 and is expected to decline further this year,” Dolan notes.

As the Japanese economy continues to show signs of improvement, Japanese investors may choose to keep their investment dollars at home. If the decline in uridashi issuance continues, the demand for Aussie dollars will decrease.

Finally, Dolan highlights a potential head-and-shoulders top formation on the monthly AUD/JPY chart as a negative factor. Dolan says as long as the 82.50 resistance area (established by a trendline connecting the tops of the two shoulders) holds, he looks for an eventual retreat back to approximately 74.00/75.00 (the level of the pattern’s “neckline”) over the next six months.