Australian Dollar Pause

October 6, 2011

FOREX

Over the past few days trade in markets was initially terribly negative and then more latterly terribly positive. These swings are symptomatic of a market environment dominated by fear. The Australian Dollar is no different and has traded in a range of 0.9702 on Monday to 0.9388 Tuesday and then back to 0.9660/70 overnight. In the grand scheme of things I reckon it is in a period where it is going to need to consolidate the recent massive fall. As you can see in the following two charts of the Australian Dollar against the US Dollar and Japanese Yen some major technical levels were achieved earlier this week so a period of rangy consolidation would be expected.

You can the AUD/USD low was right on the bottom of the down trend channel and coincident with massively overdone MACD (not a classical use but my system) and a huge upsize in the daily average true range.

Slighthly different indicator here on the AUD/JPY with the rate retracing and hitting the ding dong low of the start of the move from the June low in 2010. Even though i never get the time to post on the crosses regular readers will remember that I had this as a target in a comment when Velociraptor was asked a little while back.

So in many ways the Australian Dollar has satisfied short term downside targets and may be over extended and due for a pause.

But rather than listen to me all the time i thought it might be interesting to add the voice of the World’s biggest dedicated currency fund, FX Concepts. Over the past 30 or so years John R Taylor and his team have built up a solid track record and manage 10’s of billions of dollars in the FX space.

Here is what one of their anbalysts, Jonathan Clark, had to say today.

In a period of 10 weeks the Australian dollar has fallen by 15% and this is based on expectations that not only will the global economy continue to slow, but the Australian economy will falter as well. Adding to the
weakness are expectations that the RBA will slash interest rates during the next year. These three reasons are likely to prove correct in the longer-term, but we believe the downmove is getting ahead of itself. We come to this conclusion by examining the medium and long-term rate-ofchange measures, and they are
giving us oversold readings.

This doesn’t mean the currency must bottom here, and it could weaken for another week before bottoming, but further downmoves in the Aussie will now be less aggressive and shorter-lived as the currency works off its oversold condition. This makes some sense to us as the current state of the global economy isn’t as negative as is commonly believed, although it should deteriorate over time. The US economy is still growing at a pace of more 2% and even the Australian economy is holding up better than expected. August
retail sales gained +0.6% and even the housing figures improved somewhat. The RBA left the Official Cash Rate on hold for the eleventh consecutive month, although the central bank said it was prepared to cut interest rates if needed. We believe it is dangerous to sell near the recent lows and it could take as long as the end of November before another aggressive AUD downmove is seen.

The Aussie is currently in the process of forming a medium-term bottom and trading should be choppy. We are expecting it to turn down today and decline into Thursday of next week and possibly a few days longer. It should fall back to the .9425 area and this is a good place to reduce short positions as our target of the .9200 area is probably too ambitious. Following this low the Aussie should turn higher and rally into the week of October 31 for an initial peak and this overall strength should last into the end of November. Our initial target for this upmove is the .9925 area and it can trade as high as 1.0150 before peaking. By the start of December we will be looking to reestablish full short positions for a downmove lasting into the middle of the year and our target is the .8000 area – and it can fall even further. 

So a pause, perhaps a similar level to my target of 0.9200/50 on the downside before a bounce but ultimately 0.8000. Can’t say I have any areas of major disagreement there other than to say while I am watching and expecting a move to 0.8000 it doesn’t come into play in my trading strategy unless or until i see the 0.9200/50 region decisively broken.

Cross posted with www.macrobusiness.com.au

Please remember these are not recommendations for you to trade these are my views and I have my risk management tools and risk parameters that you do not have access to. Thus, 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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