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The Australian Dollar Yo-Yo

Published 03/27/2017, 09:02 AM
Updated 01/01/2017, 02:20 AM

The Australian dollar is dropping to last week’s levels after reaching a top of mid 0.77 AUD/USD. The peak, characterised by a confluence of resistance lines, proved as hard-as-nails and Australian dollar strength petered out quickly after challenging the formidable resistance zone yet again. In fact, it was the pair’s 9th serious attempt to break above a level of ~0.7730. Since April 2016, the Australian dollar has continuously spiked to touch a clearly defined either vertical or nearby declining resistance line, but then falling away from it like a stone. The resulting pattern traces out similar movements to a yo-yo.

Sellers seem always willing to enter the market whenever the Australian dollar enters the .77 handle even as commodity prices rise heavily. So, what’s preventing the Australian dollar from pushing convincingly above? The strongest negative drivers currently appear to be the Chinese economic factor, the long-term demand for Australian commodities, but most of all, risk appetite. The ‘Aussie’ gained on the back of the Trump rally, even pushing ahead after the Fed raised rates. However, the same driver that pushed the AUD up is the same driver that will continue to knock it off its perch.

The current financial atmosphere can be characterized by ominous near-term fear derived from indications that Trump will not have the political strength to introduce the tax reform, infrastructure spending and deregulation policies promised during his political campaign. The recent inability to pass health care reform has blighted financial markets and introduced a severe risk-off atmosphere. How long will this atmosphere last? Most analysts are saying that this sell off will be limited, as fundamentals remained quite strong, though with asset valuations stretched beyond almost all historical measures, who can say definitively? What’s keeping the AUD/USD from sinking below 0.71 is that Australia’s economic future still appears bright and that even if the markets do sell off drastically, any AUD will be somewhat cushioned. Any AUD price drop is viewed through the lens of the bigger picture. There would have to be a significant shock to the Australian economy for any devaluation to be sustained – the bursting of a property bubble or runaway inflation would do it. For the moment, range trading the AUD/USD appears to be the most profitable strategy.

AUD/USD Daily Chart

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