Australian Dollar Weekly Outlook and Wrap

August 15, 2011

FOREX

Last week was a tumultuous week for the AUD trading down to important support at 0.9929 where it held in very well before bouncing to sit this morning at 1.0370 as I write.

You can see in the chart above the volatility of the AUD and some selected risk markets  on a hourly basis, indexed to 100, over the course of the past week. The light blue line, which is the AUD/CHF rate was, not surprisingly as the two sides of the currency risk coin, the most volatile of the selected markets having been down 8% at once stage before bouncing both because the AUD/USD rallied but also because the Swiss National bank has had enough of the CHF’s place as the new reserve currency.

Of interest for this next week is the movements in the S&P 500 futures (red line) and the AUD/USD (white line) and you can see that the AUD actually was a little less volatile. My sense is that we should hopefully see a reduction in volatility from US equities this week and perhaps even a rally which will help the AUD/USD.

On the charts the AUD’s low at 0.9929 was bang on important support from the start of the rally back in June 2010 as you can see in the chart below.

I was so fixated on the full retracement of the 0.9706-1.1080 rally that I forgot about this level at the time it was only when I was trying to figure out why it had bounced so aggressively from the middle of nowhere that i spotted this level saved on one of my longer term Bloomberg charts. Not much good for trading now but a very good lesson that Fibonacci levels are super important. I am mostly a Fibo trader using the various ratio’s as my trade triggers. Luckily my stops of my turtle system let me keep most of the profit from the selloff last week when the AUD/USD bounced hard but this is a big level now – 0.9929.

This week we have some interesting data in the context of the AUD particularly with reference to the the chances of an RBA rate cut.

  • Tuesday sees the release of the minutes from this months RBA Board meeting. Given the RBA told us both in the Governors Statement and in the Statement on Monetary Policy that they thought about tightening the language will be instructive.
  • Wages data on Wednesday and Thursday are also important pointers with regard to the inflation debate as they will show if there is any acceleration in wages growth which the RBA is wary of with unemployment still nominally very low at 5.1%. 

Looking at the prospects on the charts the AUD has broken its one year uptrend but bounced off important Fibo support – normally I would expect a retest of the channel bottom from which it broke down through. This level is 1.0564 with 1.0496 as the 50% retracement of the fall on the way. Support now is big at 0.9929 but before that 1.0229, 1.0172 and then last weeks post employment low at 1.0114 is key short-term.

I’m hopeful that last weeks volatility in markets will give way to something more stable this week (more on that in the next post). The hope is based on my views on how this volatility interacts with traders and what it does to the structure of the market – we’ll see. But if I’m correct then this slightly more benign environment should give the AUD a chance to retest the break of the big uptrend. I expect it to fail at this point but we’ll have to see how the market looks at the time.

 greg@lighthousesecurities.com.au

www.twitter.com/gregorymckenna

This blog is for information only and does not constitute advice. Neither Greg McKenna nor Lighthouse Securities has taken your personal circumstances, objectives or financial situation into account. Because of this you should, before acting on this information, consider its appropriateness, having regard to your objectives, financial situation or needs.

If you do need economic, investment or financial advice we are happy to help.

Please Email the team at Lighthouse at info@lighthousesecurities.com.au or Greg directly on greg@lighthousesecurities.com.au

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