The Australian Dollar is a story of remarkable strength – almost death defying strength. The move above parity with the US dollar is severely damaging Australia’s export competitiveness. Moves above $1.05 are causing serious pain that is not offset by the rise in commodity prices.
There are two potential causes of the current sustained rise in the Australian dollar. First is the continued decline and weakness in the US dollar. Second is the continued rise in Australian interest rates. The Australian Reserve Bank has held off on interest rate rises, but the increase in inflation means there is an inevitable interest rate hike in the pipeline.
This makes the AUD a simple carry trade based on superior interest rates. Borrow cheap in US dollars and leave it in a politically stable Australia at 6 percent plus interest. It’s a no-brainer.
The idea that this AUD strength somehow reflects a strong and vibrant economy is less sustainable with growth cut back due to recent natural disasters, accelerating inflation due to commodity price increases, and a fall in export competitiveness due to the high AUD.
Technically the AUD is a story of trading bands and they apply with remarkable consistency. The primary consolidation band is between $0.88 and $0.94. The width of this trading band is used for all subsequent projections for the AUD.
The first target projection is $0.99. When the AUD reached this level it acts as a prolonged support level with the AUD hovering around parity. Rallies took it as high as $1.02. This broad sideways movement moved towards the upper edge of the long term GMMA Guppy Multiple Moving Averages. This is a trend support area. The rebound from near the value of the upper edge of the long term GMMA carried the AUD to the next technical target near $1.05.
Using a repeat of the trading band projections, the next upside target is near $1.10. At this level the AUD starts to cause some very severe pain for Australian export industries. Given Australia’s reliance on exports this pain will quickly transfer to political pain, including a substantial increase in the probability of the next interest rate hike, and the frequency of future hikes as inflationary pressures accelerate.
Moves towards the technical target of $1.10 will accelerate if the US dollar continues to plunge as the carry trade becomes more attractive to a broader range of investors. There is a higher probability the market will develop some consolidation behavior after the initial surge towards $1.10.
The chart does not currently show any patterns associated with end of trend behavior. There are no rounding tops, no head and shoulder patterns and no compression in the long-term group of GMMAs.
Investor support for this trend is well entrenched. The trend may include some rally and retreat behavior but short of a major external shock, there is no indication of a change in the trend direction.
In the past we have been cautious on the sustainability of the dollar rise to and above parity. It’s a problem when you allow fundamental factors to impinge on the analysis of the chart. The chart analysis provides conclusions which seemed unsustainable, and to some extent, unbelievable.
However these extreme analysis points have been verified by subsequent price activity. It’s an important reminder. When fundamental and technical chart analysis is at odds, then it’s always best to listen to the charts.
Daryl Guppy is a trader and author of Trend Trading, The 36 Strategies of the Chinese for Financial Traders –www.guppytraders.com. He is a regular guest on CNBC's Asia Squawk Box. He is a speaker at trading conferences in China, Asia, Australia and Europe.
If you would like Daryl to chart a specific stock, commodity or currency, please write to us at ChartingAsia@cnbc.com. We welcome all questions, comments and requests.
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