I have been bullish Australian dollars for some time not only because I have witnessed first hand the strength of the Australian economy earlier this year but also because the central bank is slated to raise interest rates again in Feb. Australia’s recovery is largely thanks the expansion in China. Earlier this week, China reported a sharp rise in exports that propelled the country into the ranking of the world’s #1 exporter. This is a huge positive for Australia and the Australian dollar because China has been hungry for Australia’s commodities.

This morning, China also raised their reserve requirement to cool their economy (I wish the U.S. was in the same enviable position) and JP Morgan published this awesome chart illustrating the correlation between China’s reserve requirement and the AUD/USD. According to their report:

The sample covers 19 increases since July 2006. As is clear, commodities on average appreciate and the dollar depreciates following a tightening in reserve requires. The most consistent performer is AUD, which appreciates 75% of the time following a reserve hike.

Technically the 9120 level represents decent support for the AUD/USD and I think any losses will be limited to that level. Next stop for AUD/USD should be 94 cents.

Kathy Lien is Director of Currency Research at GFT, and runs KathyLien.com.