Back in February I received a few queries on the Aussie dollar/US Dollar pair (AUDUSD) and whether it would plunge to 50 cents. At the time, European analysts were extremely bearish and forecasting such moves.
I spent a few hours staring at the AUDUSD chart and for the life of me I could not see the potential of a further price collapse. In fact, quite the opposite…
I suggested a rise to at least USD$0.70. [In other words, one Australian dollar (AUD) buys USD$0.70]. Months later, USD$0.70 has come and gone, and it’s time to take a look at this pair again.
Firstly, let’s have a look at the bigger picture daily chart to get a sense of price moves for the last year or so:
And now we’ll zoom in to look at the recent rise…
The dotted lines on the chart are the Fibonacci retracements for the complete decline from July 2008 to November 2008.
Notice the price has managed to reach and pierce the 50% retracement level, a point it achieved on Saturday morning.
Price has also entered an historical range area where a small amount of congestion occurred during the decline, providing resistance and support areas that match with the current Fibonacci levels of 50% and 61.8%.
Now, let’s take a squizz at some momentum and cycle indicators – the MACD and Stochastic, for this recent rise, and see what they tell us.
That’s the MACD down the bottom, and the Stochastic oscillator in the middle.
Note the very strong rise in the MACD moving averages over the period of October 08 through to March 09? Yet the price didn’t follow. That was the clue that suggested to me back in March that the AUDUSD pair was due for some upside, and not the drop down to 50 cents the bears were predicting.
There are a few things happening on the indicators now that have caught my attention and are bringing into focus more questions about further upside.
First, observe the stochastic, and note the readings for the pair have been in the high part of the scale for a while now.
On the MACD, despite the price making consistent new highs, the MACD moving averages have not. And the histograms are showing divergence where the peaks, as highlighted by the sloping line I have drawn on the MACD right hand side of the chart, are declining in strength while price rises.
Could it be that we are about to see the mother of all surges in the price of the pair?
If so, we will have the making of new highs on the MACD moving averages, a break through the 61.8% retrace, and a shooting for the stars as the AUD reaches parity with the USD and indeed goes beyond.
Personally I am cautious.
We are going in to a RBA rate decision tomorrow, and the market appears to be factoring in either no rate cut or indeed a potential rate rise.
Should the RBA choose to CUT rates, the FX market could well decide to throw a hissy fit and sell off the AUD.
We are entering a level of historical congestion.
The stochastic is in the “overbought” region and has been for some time. And MACD is showing hints of divergence, suggesting a possible downside.
Considering the importance and timeliness of the next RBA rate decision tomorrow, and strong support and resistance levels close to the price on the charts, I’d say you’re looking at a volatile week for the Aussie dollar this week.
If you’re one of those rare FX traders well set up to take advantage of volatility, you’re in for some fun. For lesser mortals, this week is not the best time to enter the market.
However, Tuesday at 2:30pm, may be a good time to open up a live chart of the AUDUSD pair, grab some popcorn and watch the fireworks go off as the RBA decision comes in…
Let’s hope it’s not a fizzer.
Regards,
Joe Zolin
for Money Morning Australia
[Ed note: Joe was raised as a survivalist in remote East Gippsland and has held jobs ranging from garbage collector to technical programmer. But his real passion is trading financial markets. He has actively traded stocks for 4 years, and futures for two years. Joe is currently trying to make a life where trading and analysis are regular activities. This includes his day job as a technical writer, nights devoted to trading futures markets, and weekends spent drawing weird lines on charts.]
