What does it mean for the currencies?

Some market watchers warn that sustaining these historic price levels may be difficult and the currencies remain extremely vulnerable to a global shift in risk aversion and another widescale dumping of carry trade positions. On the flip side, for now, the carry trade remains strong and underlying macroeconomic fundamentals are supportive, along with attractive levels of interest rates. Ideaglobal’s Sofat said recent gains have set the Aussie dollar on track to test a head and shoulders technical price objective at 0.8580.

“Once 0.8580 is broken, eyes will be on the all-time high at 0.8950,” she says. “I think the Aussie still has momentum to go up, so buy on dips. However, any large unwinding in the carry trade will weigh heavily on the Aussie dollar as we saw in February and March.” Moody’s Economy.com’s Stroppiana notes, “The fundamentals driving the carry trade play remain unchanged. Japan will remain one of the cheapest sources of global finance for a long while.

Thus, the carry trade frenzy and interest rate differentials will continue to provide underlying support for the Aussie this year.” Those trading the Aussie dollar would also be welladvised to keep one eye focused on base metals and gold prices. There has been some speculation that base metals could be due for a corrective pullback. Given the correlation between base metals and the Aussie dollar, if that were to occur, it could weigh on the Australian currency.