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As I write this article on Wednesday afternoon, 16 May (is that the date already?!), the Australian Dollar is trading at just under 99 US cents, some six cents lower than it was trading two weeks ago.
In my last article for the Trading Tutors newsletter, I showed the weak signal offered by the Australian Dollar just prior to the interest rate cut announced by the RBA on 1 May. The chart I used is recreated as Chart 1, below: Chart 1 (From Two Weeks Ago)
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After a false break above the old tops, the Aussie Dollar fell quite heavily and has struggled to show any strength since. Now let’s take a look at the current market action in Chart 2 below: Chart 2 (This Week’s Action)
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The Australian Dollar has been very strong recently. Those in government may argue this is because of their sound economic management but a lot of the Aussie Dollar’s ‘strength’ against the US Dollar has to do with the fact that the US Dollar has been under so much pressure lately.
In the medium to long term, I still see the Australian Dollar well above parity (1.0000) with the US Dollar, if for no other reason than we still have a lot of resources to sell and the US don’t even look like doing anything about its 15 trillion dollar debt.
However, there are some danger signs in the short term.
Firstly, there was nothing in the budget last week or in the Reserve Bank’s recent statements to give any hope or encouragement to the dollar in the short term.
Secondly, we have broken through a string of potential support levels.
And thirdly, there has been no support around the parity level with no ‘large orders’ coming in and buying the ‘cheap’ dollar at 1.00.
The 29 February top is looking a little bit stronger now and will almost certainly hold till the end of the financial year (30 June).
For traders who took short positions out of the April highs, the 100% milestone of the First Range Out from the February high is approaching, which may be a wise place to unload some of those short positions. This is shown in Chart 3 below: Chart 3 (Current Market)
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If the Aussie Dollar breaks through 0.9839, then 0.9627 is almost certain. Why do I say that? A break below 0.9839 would indicate we have expanding downswings on the bigger picture.
As strong as I believe the Australian Dollar is in the long run, it is presently starting to shape up a lot like the Euro crash of 2010. In Chart 4 below, I have used the ‘Split Screen’ mode in ProfitSource software to compare the two currency setups: Chart 4
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As I said, I will be keeping an eye on the 0.9839 level, firstly as a potential profit target for short trades and secondly to see if the Australian Dollar continues through it and therefore indicates further downside.
With a potential financial mess of epic proportions looming should Greece decide to/try to leave the Euro, it could be a bumpy ride in the next month or so.
Be Prepared!
Mathew Barnes
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