For traders of any genre, when prices begin tagging key technical lines in a predictable fashion, it is a signal that high probability trades are lurking beneath the surface and that a breakout is imminent. The direction of the impending breakout may be in doubt, but it is always a good thing, especially when trading currencies, to observe a repeating trend and then take advantage of it. Caution must not be abandoned, but it is rare that the odds announce that a party is in progress.
The Aussie dollarhas been acting recently in just such a fashion, drawing more than average attention from salivating forex traders across the globe. When it comes to currency pairs that are predictable, the “AUD/USD” usually tops the list, but lately, its reluctance to cross over resistance at the $0.945 and beyond has stumped the market. Over the past few weeks, the Aussie has played tag with its 100-Period EMA on its 4-Hour pricing chart, but lately tagging has turned to hugging. Uncertainty as to its next move has sent the ATR indicator to the depths of despair, as witnessed in the chart depicted below:
The AUD seems ready to take off, but in which direction? Oscillating indicators, the Stochastics above being just one, appear to be signaling a down move, after a recovery from last week’s jerk in the rope movement. As you might surmise, the root cause of last week’s disappointment came from another central bank governor of note, Glenn Stevens, the head of the RBA.
The RBA is not known for playing games. This group tends to be demonstrative in taking action when needed, one reason why the Aussie behaves in such a predictable fashion. When economists expect a shift in policy direction, like raising or lowering interest rates, the RBA rarely disappoints. But 2014 is not your normal year. Stevens and his crew seem to be taking their lead from the likes of Yellen and Draghi, choosing to jawbone the market with words without the necessary follow through.
Last week, Stevens followed this Northern Hemisphere playbook to the letter. For months he had complained about the high valuation of the local currency and how it would impact exports adversely, sooner or later. The recent upward channel seemed to have no end, particularly after favorable Chinese data was released. Mergers and acquisitions have also stoked the flames, as has investment capital flows from Japan. New jobs are up, as well as business confidence levels, and within this framework, Stevens chose to balk once more. He tried to talk down the value of the Aussie.
It may have worked for a day or two, but new data out of Japan shows that Prime Minister Abe’s encouragement of local investors to expand their portfolios with foreign investments is working. For the second month in a row, Japanese investors have shown a renewed interest in Australian bond issues. Australian stocks have also kept their high levels, despite a drop in export trade volume. It was not that long ago, May of 2013 to be exact, that parity with the greenback was a reality. No one is expecting those days to return anytime soon, but the currency’s resilience does not support a big fall theory.
Analysts also seem stuck in neutral at what the future might bring. Any articles regarding the Aussie have been cautious in nature, choosing to talk about the history of ups and downs, rather than speak to what the future might bring. The same tight ranging conditions are also present across other major pairs.
Only one thing is certain at this juncture: tightly ranging markets do eventually break out.
Disclosure: Trading Foreign Exchange on margin carries a high level of risk and may not be suitable for all investors. The possibility exists that you could lose more than your initial deposit. The high degree of leverage can work against you as well as for you.