Charting Asia

Published: Tuesday, 13 Oct 2009 | 3:10 AM ET

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The Australian dollar has hit a 14-month high against the U.S dollar, prompting investors to speculate once again, if the currency will reach parity with the greenback. According to historical charts, that outcome is unlikely anytime soon.

The last time we issued an invitation to the Aussie dollar parity party in July 2008 the Aussie collapsed in surprise.

The rarefied air near parity turned out to be poison. It is an important reminder of the volatility of rapid trending behaviour in this currency. There are two schools of thought about the sprint towards parity.

The first, and traditional school, suggests the Aussie is a commodity currency. The gold price is high so the Aussie is high. Commodity prices have been on a  gallop for most of 2009 and this has driven the Aussie upwards in a stellar trajectory. 

This school seems to ignore the impact of a rising dollar in terms of export pricing. The rise in gold, valued in US dollars translates into a fall in the price of gold in Aussie dollar  terms due to the race towards parity. The same applies to other commodities priced in US dollars.

The second school links the meteoric rise to the changes in interest rates. The hike by the Australian Reserve Bank put a rocket under the Aussie and quickly lifted it above $0.89.

We leave it to you to decide which if these fundamental factors underpin the momentum trend rise.

From a charting perspective is the nature and character of the rise that is more important than the reasons for the rise.

We start with measures of trend strength.

The first is the Guppy Multiple Moving Averages indicator display. The long term group of averages, shown in red, define the behaviour of investors. The short term group of moving averages define the behaviour of traders.

The degree of separation in the long term group is consistent. More importantly, when a sell-off occurs and price dips towards the long term GMMA there is no compression. This suggests investors are aggressively buying on any price dips and this shows strong trend support.

This strong trend support enables a relatively high level of trading activity with rally and retreats of $0.03 to $0.05 in a short time frames. This is price volatility. The price trend is defined with the trend line starting in March 2009.

The second anchor point is in July and the third in September. This line is placed with the benefit of hindsight and it is use dot manage the trend going forward from October. The position of this trend line is a broad guide to trending behaviour. Between March and July the price moved well above the trend line. This suggests the trend line is not the best tool for defining the trend change.

Currently a fall below the trend line is not confirmed with an almost simultaneous  fall below the lower edge of the long term GMMA. This may result in a  false exit signal. This is important because it makes it more difficult to select the appropriate end of trend exit signal. This condition also underlines the potential instability in the trend from a technical perspective.

So how high can the Aussie go, and how do we decide this?

The target level is $0.95 before Christmas, with a potential spike towards $0.97. The weekly chart gives a better idea of how these  conclusions are reached. There are three key support and resistance levels. The lowest is at $0.84. The midpoint is near $0.89. The highest is near $0.95. The breakout above $0.89 sets the upside target near $0.95. This is not a  smooth ride. Previous volatility has included volatility falls of $0.04 between these trading bands.

A move above $0.95 hits historical resistance and likely central bank intervention near $0.97 and above. This has a low probability of developing a consolidation pattern. There is a higher probability of developing a trend break and trend reversal.

• The Dollar Meeting No One Talks About

The Aussie is vulnerable to a rapid trend break. The history in July 2008 shows how quickly parity poison can work. But in 2008 the trend break was confirmed with a fall below the long term GMMA and a fall below the trend line which was almost at the same value. Today is different with the trend line value well above the lower edge of the long term GMMA and that could be poison for traders focussed on parity.

If you would like Daryl to chart a specific stock, commodity or currency, please write to us at . We welcome all questions, comments and requests.

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