We never want to get too bearish just for the sake of it but the Australian Dollars break down through my target from earlier in the week of 1.0322 yesterday and then this morning’s take out of 1.0230 suggests to me we are on the verge of a cascade that may see us all the way back to 0.9388 at some point soon.
So far the markets are behaving in an amazingly subdued manner given all that has happened in Europe last night and the night before. In the high stakes game of poker we have seen early in our time zone today President Sarkozy and Chancellor Merkel up the ante on Greek Prime Minister Papendreou and they are now effectively saying you are either in or you are out. In withholding aid till Greece sorts itself out they are putting markets into a twilight zone of at least a month.
I always reckon markets abhor a vacuum and the likelihood is that something must fill this void and it is most likely to be fear and uncertainty.
That being the case, and noting that investor sentiment is one of our drivers, then without resolution it will be hard for the Australian Dollar to retain sustainable upside. Last night’s bounce and subsequent selloff was a case in point. Add to this the concerns we highlighted earlier about China and German economic growth and increasing chances of more RBA cuts and I see a somewhat bearish outlook.
So looking at the daily chart below you see that the 1.0230/40 region is really important support on the daily charts and the AUD/USD is sitting just around it as I write. It is both the 38.2% of recent up move as well as the 50% retracement of the big move down from 1.1075/80 to 0.9388. So it should be solid but if it breaks we could be in for a much deeper – perhaps total retracement of the recent rally.