19th November Aussie/USD overview
19th November 2009
Currency Overview
Focus on Spot AUD/USD (Aussie)
The last week has seen the Aussie challenge previous YTD highs at 0.9330, driven by the continued flight into carry trades against the USD. This trade has fed into markets across the board, and the Aussie remains one of the major indicators of global risk appetite, and therefore is most vulnerable to sentiment shifts.
Thoughts from the trading floor
The technical outlook for the market remains bullish. The dip lower going into the first week of the month served to be a good buying opportunity, as the market tested daily trend support (currently at 0.9097) before rallying up to the 0.9400 handle. Since then the market has seen choppy trade around previous YTD highs of 0.9330, which is now acting as a good short-term pivot. This morning has seen the market pull down towards the 0.9097 daily trend support, drawn from March lows. The key retest of this may prove to be pivotal for the outlook of the market going into year-end for markets across the board. A bounce form this support may see the market then resume its rapid up-trend, where we would expect a challenge of current YTD highs of 0.9407. A break above here could see the retest of the important 0.9477 level. Further resistance would be 0.9648 before all time highs at 0.9850 (made in summer 2008). A key break of the daily supporting trend may result in a sharp short-term corrective trend down to 0.8862. A key break below here may mark the onset of a medium term corrective trend back down to 0.8473. However, this would require a strong fundamental shift in market sentiment away from risk.
This outlook for the Aussie is heavily reliant on both the carry trade against the USD, for which we must pay close attention to comments from the Fed and the RBA, and the outlook for China. On this note, the FOMC policy announcement in early November was fairly significant. With the Fed outlining an exit strategy from their expansionary monetary policy, being a pickup in inflation expectations and an improvement in the employment situation, markets were effectively given a green light to continue to sell USD. Also this week’s RBA Minutes showed that the Bank is happy to see a strong currency as it is helping inflation return to their target (it is too high at the moment). With these fundamental factors in line, we could see the market eventually trend to the 0.9850 level in the short to medium term. However, worryingly for the bulls, as increasing number of participants enter into the Aussie/USD carry trade the likelihood of a strong trend reversal becomes increasingly likely. A break of daily trend support may become the “straw that broke the camel’s back” for the market.
Bull View
The bulls will look to defend the supporting daily trend for the market and hope that the status-quo as far as central banks’ policy concerned remains. Should the trend remain intact the market could trend up to the 0.9850 level by year end.
Bear View
The bears will see the current trend of USD weakness resulting in higher equity and commodity prices as a new bubble in the making. A key break of the daily trend at 0.9097 currently may result in further short-term weakness leading to a potential rout. For this to happen we would have to see a shift in risk sentiment across the board. Policy actions by the Fed or RBA may be required.
Futex View
We favour the current market trend to be a “bubble” waiting to burst. We will look for weakness below the daily trend-line and look to be aggressively short if we start to see panic in the market.
