The Australian dollar has pulled back a bit after a strong rally, and I think it’s an opportune time to set up an Aussie dollar debit spread, based on supportive technicals. There have been some signs of stabilization in the global economy, and as a key commodity exporter, Australia is likely to benefit. The return of the carry trade is also boosting the currency.

China and Japan are key importers of commodities, and copper futures rallied to near a six-month high this week on ideas global demand from these and other nations will increase. Last week, Japan announced a $154 billion stimulus measure, representing 3 percent of its GDP. There has been talk China will likewise unveil some sort of additional stimulus soon as well. We should see a run in the Aussie dollar if there are signs these nations will pick up their purchases of commodities.

The Australian dollar has risen 3.5 percent vs. the U.S. dollar in April. While disappointment in China’s quarterly GDP reading released on April 16, 2009, was said to be knocking the Aussie dollar back, I don’t think the news is that bad. China reported economic growth has slowed to 6.1 percent in the first quarter 2009, down from 6.8 percent in the prior quarter.

In addition, we’ve seen signs of a return of the carry trade, which should continue to fuel the Aussie dollar. Carry trades involve selling currencies with low interest rates and using the funds to invest in those with higher rates. While the carry trade had fallen out of favor for a while, recently, traders have been selling dollars, euros and yen to purchase currencies in countries such as Brazil, New Zealand and Australia, where interest rates are higher.

I recommend a debit spread in the Aussie dollar, which involving buying a call and selling a call in a higher strike. Consider the September 75/80 call spread, should cost you about $1,200, not including your commission cost. That is your defined risk on the trade. Every point move is $10 in the Aussie dollar options, so your maximum profit potential would be $5,000 if the market moves in our favor. Subtracting your $1,200 cost to purchase the options gives you a net $3,800, not including your commission. These options expire September 4. I don’t think the market will pull back under $0.70, but if the market starts to break down, you can cover the short end of the trade and hold the long end. Consider this a calculated risk-play.

CME Group September Australian dollar futures were last trading at $0.71810.

Feel free to call me for more specific strategies in this or other markets to suit your individual risk tolerance, and ask about a special half-off offer for new clients.

Phillip Streible is a Senior Market Strategist with Lind Plus. He can be reached at 800-803-8037 or via email at pstreible@lind-waldock.com.

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