Australian dollar weekly wrap

See the latest Australian dollar analysis here:

Macro Afternoon

It was a volatile weak for the Australian dollar, trading a broad range. At the close it has satisfied the next near term target in its downtrend that I had identified in yesterday’s Technical update and last week’s Wrap.

That is, a daily close below 1.06 and to the extent the Aussie is closing lower (1.0573) as I write this simply reinforces my view that a medium term top is in.

Non-currency readers might wonder how the Aussie could go from so bullish to a changed outlook in the space of, what is essentially, a few trading days. But the  key point here is that we hit key long term technical resistance for the Aussie while at the same time the USD seems to be basing, and the action in the Silver and Oil markets have got investors nervous. This nervousness translates to less conviction to take an Aussie rally of 13 cents from .9706 any higher and once that happens sellers suddenly get a look in and bears are free to roam.

Equally, given the size of this week’s range of 4.5 cents, coming after last week’s 5 cent range, volatility is increasing and this too feeds on itself. For those that didn’t see yesterday’s tech piece let me reiterate what I said about turning points and then lets look at the USD.

Turning points are never easy times for markets as the previous bulls cling to their tendencies and the emerging bears are a bit shy of using the full force of their conviction for fear of getting stampeded, Pamplona style.

It makes for skittish trade, which is what we are seeing at the moment particularly in the AUD which traded in a 3 cent range in the past 2 days in particular and last week in general.

In terms of support for my view that the dynamics in FX markets, and thus risk and commodity markets more broadly might be swinging back the other way, Bloomberg quoted John Taylor, who is Chairman of FX Concepts – the globes largest FX Hedge Fund, as saying

This is the end of the nice slow moving risk rally that has lulled us pleasantly to sleep since the first half of 2009…

This warning is worthy of a brass band and bright lights as the other side of this low volatility rally will most likely be a scary descent that will have a very negative impact on markets. Our statistical models say we are about at the end of the road for risk.”

“Nice slow moving risk rally”, that’s what I have called previously the benign growth QE period. It has been extremely beneficial for the Aussie and anyway it’s that time of year when things turn so we’ll see.

Now for the USD.

This chart is the USD Index since 1990 and while I and others might be saying that it has “turned” or “based” the long term reality is that this is a curency that is very weak still. Indeed in the past 5 years it has been trapped in the bottom third of its decade long range. Since the low in 2008 it has been unable to break up through the 38.2% retracement level of the 2002-2008 downmove. So if it is turning this is a monumental move for global markets given its linkage into other asset and commodity prices.

But I’m not getting overly bullish the USD at the moment even if I think this might be an important turning point in what is essentially a multi-year trading range because “their is much wood to chop”. This is particularly so we we look at the recent daily charts.

This chart represents the daily price action of the USD Index for the past year, the down trend is clear. It has broken this years downtrend and retested the line which is a good sign for the bulls but the overall downtrend resistance looms large at 77.13 and the MACD’s are getting “frothy” by my reading. A weekly close at current levels is good news because it is back above the breakdown level from March’s selloff.

The current price is just below the 38.2% retracement of this years selloff at 75.988 with the 50% in line with the downtrend line. My sense is a test of the downtrend line is in the offing and then we’ll see from there.

Why so much time on the USD in the Australian Dollar Weekly Wrap? Because it is one of our the key inputs in our 5 driver model and has a feedback loop via the commodity markets and prices into expectations about the Aussie and our economic and investment fundamentals.

So the USD looks to me be basing and will be testing significant short term resistance in the next week which will accord with Aussie testing support at 1.05, 1.0440/50 and then ultimately 1.0359 which is the 50% retracement of the .9706 – 1.1013 move. Buyers are suggesting they’ll be back in at these lower levels but it just depends on what is happening in other markets and how the interplay of our 5 drivers is working out. I think we’ll get to find out in the next week or so.

Disclaimer: This post is not advice or a recommendation to buy or sell. We have not taken your specific circumstances into account. Do your own research and consult an adviser before allocating capital or undertaking hedges.

Latest posts by _EcoRon_ (see all)

Comments

  1. Thanks for the post DFM, a good read.

    I agree that the AUD/USD is at an inflection point, testing support, and the next week is key:

    http://www.avidchartist.com/2011/05/audusd-weekly-and-daily.html

    The frothy MACD that you pointed out on the USD chart could be a classic “kick-off” signal… oscillators often go beyond their usual extremes when the trend is changing at higher time frames.

    The EUR/USD is 58% of the USD index, and I believe the EUR/USD trend is now down on the daily chart time frame, and it has certainly has been a traders paradise this past week, moreso than the AUD/USD I think:

    http://www.avidchartist.com/2011/05/eurusd-moves-lower.html

    As always, bring on next week, I look forward to it!