Will the Australian Dollar break support at 1.0380/1.0405?

March 21, 2012

FOREX

Nothing like a good China story, well actually a bad one, to get the Australian Dollar moving.

From the NAB’s morning note this morning,

Equity markets were weaker overnight after mixed US housing data and also concerns about the strength of the Chinese economy. Both BHP and Rio Tinto warned that Chinese demand for iron ore is slowing, with BHP saying that steel growth rates have already flattened. The president of BHP’s iron ore division said that growth in China’s demand for iron ore will drop “to single digits, if it is not already there,” but remains positive about the long-term outlook as demand strengthens in other Asian countries.

 Slowing Chinese demand for commodities should not really be “news”, as last week the China Iron and Steel Association revised down its 2012 output growth forecast to 4%.

Not sure I agree with the idea that news on Chinese demand for commodities  should not really be news when it comes to either the globe or the nation on the planet most highly leveraged to chinese demand for currencies and particularly for that nation’s currency, the Australian Dollar, I most heartedly disagree.

As readers know I am a Behavioural Finance/Economics guy so I’m always interested in how markets react to news – probably more so than the actual news in some ways. It tells me about sentiment, it tells me about market positioning and it tells me about where the risks to positions I might have on or for those I might be advising have on.

Certainly in some ways it is Keynesian Beauty Parade  writ large but its more than that and in the case of the Aussie Dollar which bounced nicely off important support last week only to fall back under 1.05 overnight/this morning we have to ask ourselves are the bulls who have been constant buyers and perpetual accumulators losing the fight.

Lets have a look at the charts.

On Sunday I wrote,

You can clearly see the bounce away from important support but equally however the Aussie has not broken back above the downtrends line it broke through a week or so ago. Also worth noting is that for the moment my Double Bollinger band system is still short Aussie Dollars in favour of US Dollars.

As it stands Sunday night I will be stopped out for a small profit at 1.0628 should the Aussie rally up there on Monday, for the moment however I am still short. 

Well, as fate would have it my Double Bollinger Band strategy on the dailies got stopped out (small profit) even though it felt wrong at the time from a subjective point of view – such is the way of systemised trading.

So this morning the chart looks like this,

You can see the failure once again at the old up trend line – that for me is a real warning of an inability to go higher and infact we now have a tentative down trend line from the highs in February above 1.08. the reason i say tentative is that I always look for 3 touches to confirm the strength of the line in traders minds. 

So where to now?

Nothing has changed from previous posts about the importance of the zone the Aussie Dollar is now approaching for support. The 1.0380 range top from late last year early this year remains the key support zone at the moment. The co-incidence of this region with the 200 day moving average at 1.0403 and the 38.2% fibonacci retracement of the move from  0.9663 last year to 1.0854 recently which comes in at 1.0399 – simply reinforces this zone as key support. 

But I would never ever pre-empt the break of such important support and the Aussie Dollar may yet again bounce off it still.

Am I bearish?- Yes, I’m getting that way.

Do I respect this zone of support? Absolutely as I have stated above.

But if it breaks another of my automated systems will go short. 1.0259 is the 50% retracement of the 0.9663-1.0854 and below that the last line of support from this move, in a Fibonacci sense, is 1.0118. 

Have a great day

www.twitter.com/gregorymckenna

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 however you do need advice on Investments, Economics, Funding and Liquidity, Interest Rates and Forex and Derivative markets 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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  1. China is not a one way bet for Australia | Lighthouse Securities - March 22, 2012

    […] the impact of a further slowdown in China or more subtely perceptions of Chinese economic growth as I highlighted yesterday. It has fallen back again overnight but so far has held above the key support zones I have […]

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