Because of the county’s strong mining sector, the Aussie dollar has a strong correlation with gold. The recent surge in gold prices is helping to provide a floor in the Aussie dollar around parity. Not only has the strong commodity sector helped to boost the Aussie dollar, to record highs against the U.S. dollar, but the economy continues to weather the economic crisis reasonably well. The country has relatively low unemployment at 5.2% and high interest rates at 4.50%. These are just two reasons why the AUD futures have been climbing since early 2009. However it is definitely not an easy trade. Looking at the weekly five-year chart we can see the high volatility in the Aussie dollar. Not only does low volume create the wild swings but the recent economic conditions have not helped.

The Aussie dollar at the best of times is a risky trade so when pessimism and fear is high, investors flee the market place as fast as possible and jump into safer investments like gold, U.S. treasuries and the U.S. dollar. When trading AUD, investors need to be able to react quickly to changing situations. “…with no real sign of any EU progress, it won’t take much to deliver a knockout blow to the markets. Importers are advised to exercise caution, and cover their FX needs ahead of the rising tide of uncertainty,” wrote analysts from Forex Group, the highlighting the continued uncertainty in the marketplace.

When trading the Aussie dollar it is important to watch a fairly wide trading range. In the last two months alone, AUD futures have traded between support at $0.9500 and resistance at $1.0800. There are some signs that the trading channel is starting to narrow with initial support now at parity ($1.0000). What also makes the Aussie dollar a very interesting trade is that a break towards $1.10 would create a blue sky trade, which means prices are in uncharted territories and the sky is the limit. In this kind of trade it is important to watch volume and momentum. The strong the volume, the stronger the momentum and the higher the price will go. As soon as volume weakens, traders should be looking for a quick exit because once the trade starts to unwind, it will unwind fairly quickly.

There are some limiting factors in AUD that traders should be aware of the biggest one being interest rates. On Nov. 2 the Reserve Bank of Australian cut interest rates by 25 basis points (0.25%) to 4.50% from 4.75%. The RBA is pretty much the only bank that is cutting interest rates right now because their rates are still relatively high. Investors see that the Australian economy has room to fall further and so far none of that weakness has been priced into the marketplace. If the RBA continues to cut rates over the next few months, traders and analysts will have to re-adjust their expectations, which could drive down prices.

The strong Aussie dollar could also create a slowdown in the domestic economy. One of the reasons Australia has been able to compete in the global marketplace is because their currency was much weaker than the U.S. dollar, which increased investors’ buying power; however that competitiveness is starting to disappear. A similar situation is occurring in Canada, which has had to deal with a stronger currency since about 2007.

On the downside, a break below $0.95 on high volume could lead to a test of $0.90 and if volume is high the price could easily drop to a low of $0.80 fairly easily.

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For more updates from Greg, be sure to visit his blog at TheTradingZone.com