Planning the Parity Party Down Under

In April of 2001, Australians could do little but stay at home with the Australian dollar trading at 48 U.S. cents. Fast forward 7 years and the weakness of the Australian dollar is a distant memory as the Aussie magic pushes towards parity with the U.S. dollar.

Australian Currency
Australian Currency

The Australian dollar has become the 'must-have' accessory for foreign travel. The weekly chart clears out the static of daily volatility and lets us examine the trend more clearly.

The rise of the Australian dollar is a recent trend. Between February 2004 and March 2007 this was a largely trendless market ranging between $0.69 and $0.795. This rally and retreat activity provided good trading opportunities but they did not reflect the commodity boom that was well established before 2007.

Gold started the first of its upward runs in late 2005. Oil more than doubled in price between 2003 and 2006. It doubled again between 2006 and late 2007. The Aussie dollar slumbered in a trading band until March 2007.

The breakout from $0.795 and the subsequent dramatic retest of this level in August 2007 must be seen the context of the long sideways movement. Australian dollar strength is a mirror reflection of U.S. Dollar weakness rather than a good correlation with commodity market.

guppy aud july 281.jpg

The key features in the chart are all defined by the Guppy Multiple Moving Averages (GMMA). First, is the consistent wide separation of the long-term group of moving averages. Even the sudden drop in August 2007 was not enough to trigger strong compression in the long-term group. This tells us that long-term investors remained in the market as buyers when the retreats developed. The drops were trader driven and not supported by investors who remained convinced of the long-term rise towards parity.

The second feature is the degree of rally and rebound activity. The retreat and rebound pattern is seen in August 2007, in December 2007 and to a lesser extent in March and June 2008. The current retreat can be placed in the context of this long-term trending behavior. It suggests a high probability of a rebound. Each rebound phase has created new highs. The rebound from the current pullback has a high potential of achieving parity.

The third feature is trend strength measured using a GMMA Trend Volatility Line (TVL). This is normally used to set a trade management stop loss but also provides a useful way to define the volatility of the trend.

The most important features of the TVL on this chart is the recent consistent duration of the trend stop loss and the consistent width of the GMMA support band. Each 'step' is about the same length and the same height. This consistency confirms a strong trend with a very low probability of a sudden trend change.

This suggests that even a substantial dip in value is most likely a temporary event rather than a precursor to a trend change. It suggests that a pullback to $0.93 is consistent with a continuation of the trend towards parity and beyond.

Parity is a psychological and political barrier so traders will be ready for sharp reactions and increased volatility near this level. Trend strength and low trend volatility suggest the two dollars will have an extended play-time at parity.

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