Some big cracks are finally starting to appear in the Australian dollar.
I’ve been ignoring the Australian dollar for months because it has been caught in a tight range, going nowhere fast.
The buying forces of offshore money coming into Australia in search of yield have been neatly balanced by the selling forces from our weakening terms of trade. The result has been an Aussie dollar seeming to defy gravity and holding steady around US$1.03–$1.05.
But the dumping of commodities over the past week has finally started to apply some extreme pressure to that balance…
The Technical Picture for the Australian Dollar
The chart below shows the widening divergence between the Australian dollar and the Commodity Research Bureau (CRB) index. This makes it quite clear that the Aussie dollar has been dancing to its own tune for the past couple of years:
CRB Index vs AUDUSD
Commodities have had an influence but they have not had their usual effect. If the above divergence were to disappear we could see the Australian dollar heading below the mid-90’s.
Of course the reverse could happen and commodities could bounce from here. But I strongly doubt it the way the data worldwide is currently rolling over.
AUDUSD Daily Chart
A close up of the Australian dollar over the past three years shows that it has been caught in a symmetrical triangle. Symmetrical triangles are often seen as continuation patterns in classical technical analysis but there is no reason why this won’t be a reversal pattern, meaning that it could break out of the triangle to the downside.
You can see that the recent rally to US$1.06 saw prices poke their nose out above the top of the triangle and then be quickly rejected from there, collapsing to US$1.03 in a couple of days.
The next stop for the Australian dollar is of course the last major line of support around US$1.015–1.02. I would expect to see some buying around that level but I don’t think it will be enough to turn things around. If that last line of support gives way then you could expect to see the Aussie heading towards parity in short order.
From there the Aussie dollar would be testing parity as well as the lower edge of the symmetrical triangle. If that can’t hold the Australian dollar would run out of friends pretty fast.
If you have another look at the chart above you will see a lot of black circles. They show you when the 10 day moving average has crossed under the 35 day moving average, signifying a shift to what I call the intermediate downtrend.
In seven out of the eight previous occurrences the Aussie dollar fell from this point. In a few of them admittedly the downtrend didn’t last long. But there was definitely an impulsive move to the downside after the trend shifted.
You can see that the trend did shift back down into intermediate downtrend last week so we may be in the early stages of an impulsive decline.
From where I sit there is a set of dominoes piled up from here to around US$0.98, and it could happen quicker than most expect once it gets going.
I have been thinking about all of this money hitting Aussie shores from Japan and wondering whether they are jumping out of the frying pan and into the fire. If they pile into the Australian dollar just before it does a swan dive on the back of our weak terms of trade will that hot money stick around or will it run for the exits? My feeling is that they may dump their positions if the currency has a substantial move.
So the force that has caused our dollar to hold up against all odds could turn and start to head in the other direction if the Aussie has a big move to the downside from here. All of a sudden I can make a case for seeing the Aussie dollar moving 10c or more to the downside in a worst case scenario.
The Driving Factor Behind the Australian Dollar
I thought the selloff from early 2012 would continue but was amazed by the resiliency of our currency. Perhaps there will be so much money heading to our shores due to the low yields world-wide that this theme of the Australian dollar being stronger for longer will continue for many more months to come.
But I always come back to the idea that the terms of trade will end up driving the value of our dollar as it always has in the past, and at the moment the Aussie dollar looks expensive in a world economy that is coming off the boil at a rapid pace.
Though, the fact that the world economy is coming off the boil doesn’t seem to matter to the markets one bit at the moment. Take yesterday’s huge rally as an example. We saw PMI figures released by China and Europe. They were basically terrible across the board, but what did the world’s equity markets do in response? They shot higher by 2–4% in one day.
The markets have now entered the twilight zone. Up is down, down is up, good news is good news and bad news is better. Attempting to analyse anything other than the flow of funds is becoming increasingly difficult.
So the fundamentals for the Australian dollar don’t look good. The technicals say that there could be trouble under US$1.015–1.02, but the flood of money hitting our shores looking for a safe harbour will be the deciding factor in the direction of our currency going forward.
Editor, Slipstream Trader
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