Australian author Donald Horne penned a book in the 1960s called The Lucky Country. The irony of the title eluded most readers who assumed it meant Australia was blessed with good fortune. Horne meant that given the bumbling mismanagement of Australian leaders that Australia was lucky to be as well off as it was. Fifty years later nothing seems to have changed and this is reflected in the relentless rise of the Australian dollar.
Australian politicians would have people believe that Aussie dollar strength is a result of solid economic performance. The reality is slightly different. The strength is primarily a function of interest rate differences. It’s become ‘the’ carry trade.
Traders borrow U.S. dollars at almost zero percent interest and throw it into Aussie dollar interest bearing accounts for a lazy 5 percent to 6 percent. Like the earlier yen carry trade, it’s a no-brainer. And like the earlier yen carry trade, this mechanism feeds on itself with success breeding even more success and higher currency levels.
The damage inflicted on exports by a high dollar is dismissed, although ex-gratia compensation grants have already been made to selected industries. The damage inflicted on Australian businesses by a flood of now much cheaper imports is also dismissed as Australian consumers gorge themselves on flat screen TVs and Internet purchases. It seems almost too good to be true.
The weekly Aussie dollar chart shows a significant pattern, and an important breakout. The dominant pattern is the equilateral or pattern. This pattern is created when two equally valid, but opposing trend lines can be placed on the chart. The upper trend line is a down sloping line and shows the thinking of the bears. The lower, up sloping trend line shows the thinking of the bulls. They are evenly balanced so the pattern is a pattern of indecision.
It’s the breakout from the pattern that confirms the direction of the longer-term trend. The breakouts can be very rapid and powerful. The upside breakout suggests the Aussie dollar is about to resume a new and powerful uptrend. The chart pattern delivers the bad news. The initial, upside target is a retest of $1.10. However, the chart pattern suggests a much higher target.
The target is calculated by measuring the width or base of the triangle pattern. In this case it starts from the low near $0.94. This start point is followed by three weeks of continuous price action moving in the same direction. This is the valid base of the triangle. The height of this base is measured, and then this value is projected above the trend line at the point of the breakout. This gives an upside target of $1.18.
The full completion of the chart pattern suggests an initial target of $1.18 and this is usually followed by a consolidation. Often in this environment the price reaches the pattern target, but then retreats and develops a consolidation at a slightly lower level. Currently there are no chart-based features for estimating where this consolidation area may develop.
The breakout towards $1.18 is unlikely to be a single smooth rising trend. During this rise sub-patterns will develop and these may be used to validate the initial upside target calculation based on the symmetrical triangle. The detail of the breakout remains unclear, but the general direction and the potential targets are well defined.
With an Aussie dollar moving towards $1.18 the currency inflicts real pain on the Australian economy. It will force the restructuring of industry and undermine the foundation thinking of the Australian resources boom. Only a reduction in Australian interest rates will unwind this carry trade and destroy the Aussie dollar uptrend.
Daryl Guppy is a trader and author of Trend Trading, The 36 Strategies of the Chinese for Financial Traders –. He is a regular guest on CNBC's Asia Squawk Box. He is a speaker at trading conferences in China, Asia, Australia and Europe.
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