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Wednesday, 6 February 2013

Is the AUDUSD in the early stages of turning?



One of the questions asked many times over the past couple of years is whether the AUDUSD spot is due to turn down? Many people have put money on the table on this particular trade over the past couple of years, and many have lost that money. However, I sense there are some signs that the AUDUSD may be starting to turn. Below I present a series of charts highlighting my thoughts on this particular currency pair. 

The first chart is the Long-Term chart: – The key feature here is what appears to be a potential reversal‘Descending Triangle’ pattern, bounded by the Blue lines on this chart.  – This pattern is a long-way from any sort of verification, however we may be close to rejecting the attempt at the upper resistance line on this chart, and any clear failure up at these levels may be the precursor for a push towards the low of the pattern in coming months, which sits around the mid-95s. Below the chart is an example of a reversal 'Descending Triangle' pattern.
The second chart is the Weekly chart: – The main feature of this is the extended sideways consolidation of the past 6 months. The past month has seen a rejection of the upper part of this consolidation, and appears to be heading back down towards the low of this range at 101.50. - Within the context of the longer-term chart above, this is not a major move; however any sustained break below 101.50 could be the catalyst for a deeper decline, with the low of the potential 'Descending Triangle' pattern as a possible target.
One of the arguments against the AUDUSD fx rate moving lower is the relatively steady yield gap, which in the current environment would seem to suggest little room for a significant move. The  charts below highlight the recent relationship between the AUD and USD yields over the past few months compared to the AUDUSD spot rate: There has been a close visible correlation between the yield spread and spot FX rate. It would seem based on this that a significant move lower on the AUDUSD would be unlikely.


However, correlations can be misleading; they are only useful as an indicator up to a point, eventually they adjust or break-down. – The next chart below shows the 2 year yield spread versus the AUDUSD spot rate over the past 6 years.  The yield spread has contracted by around 200 basis points over the past two years, with very little change in the general level of the FX rate, perhaps this FX rate could move lower without the general yield spread moving. If this were to happen, this may simply be the FX restoring the prior relationship between the two, or to put it more simple, perhap sthe FX rate will now play catch-up.  
The final chart shows the daily AUDUSD chart. -What is interesting about the move today, is how it has broken the trend of rising reaction lows which has been occurring since early October. This could e a significant ‘Tipping-Point’ if the move is confirmed in the next couple of days .

Finally, there are a number of forces at play in markets at present, with a number of countries actively or encouraging a weakening in the currency. There are no signs at this stage that Australia is part of this movement, however it would be interesting were there to be some move by Australia on this front, particularly with the recent announcements of the Australian election for September this year, and the focus on growth as a priority ahead of restoring the budget back to surplus.

Technical Analysis Note: One of the risks with Technical Analysis is the high degree of subjectivity involved, and the adding of the lines on the Monthly chart is an example which makes the pattern seems apparent. At this stage the pattern in the monthly chart is a long-way from being completed, and could easily dissolve away during the next few weeks and months. Nonetheless from a trading perspective it does highlight possibilities, and long-term investors may see this as offering a good risk/reward possibility.

About the author:

STEVEN GOLDSTEIN is a qualified executive coach and performance coach who works with traders and portfolio managers at some of the world’s leading hedge funds and investment banks. He also provides technical analysis research on a number of major cross currencies for 3CAnalysis. Prior to that Steven had a 25 year career as a trader working at Credit Suisse, Commerzbank and American Express Bank in London in the FX and Fixed Income markets, where he used technical analysis extensively as a trading tool. Steven is also member of the Behavioural Finance Working Group at Cass Business school, has written articles and presented on the subject of Behavioural Finance, and is a lecturer on the Society of Technical Analysts diploma programme. - Please feel free to contact him on sgoldstein@bgtedge.com or visit his website at www.bgtedge.com.

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