Case Study: Australian Dollar Analysis – How To Deal With A Trend Line Break

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The Australian Dollar or “Aussie” continues to remain well bid, and at the time of writing sits just below highs not seen for some 8 months against the USD. Let’s go through some of the recent dynamics that have been playing out in the AUDUSD and get some perspective as to where we see the currency post July 1st RBA Cash Rate announcement where rates were left on hold.

Refer to the chart below. Since posting a low of 8660 on January 24th 2014, the currency has maintained a clear uptrend which right now remains intact. Looking at the cash daily chart we observe a valid trend line that extends from the low until a breakdown on 20th May. This brings us to our first point. When a market shows good trending structure over a period of time, it is apparent to “the world” that this trend exists and the trend line shown below is obvious to everyone. That said, it is also apparent to all and sundry that there is a clear break. Pause. Stand back. Think for a few moments about this. One of three things are happening : the currency is headed lower in a new trend; the currency is making a false beak; the currency is about to start range trading. Simply, we do not know what will happen as none of us have a crystal ball. However there are numerous clues here that bring us to our second point.

When a market makes a break of a trend line that has meaningful structure, as is the case here, it is bad practice to simply sell on that first break. We need to wait for two completed daily bars below the trend line before we can then say that we will sell this market. In which case we attempt to short the market on price moves below the lowest of these two bars. In this case the lowest of these two bars was at 9209 on May 21st. No subsequent bar went below this. So no short was put on.

Thirdly, take a look at the Fib retracement from the low on January 24th at 8660 to the high on April 10th of 9461, prior to the breakdown of the trend line. Notice something? The market could not even retrace 0.382% of this entire up move. This is another clue as to the underlying strength of the AUDUSD.

Fourthly, observe the horizontal line of support that held just above 9200. The ring low completed on June 4th just above this support and a subsequent long on June 5th at 9300 just above the prior day’s high, was the trigger. The currency has moved up to as high as 9504 on July 1st.

Fifthly, note the sharpest moves since the break of the trend line have been up. This is another clue that the market has underlying strength when a market exhibits trending characteristics, the sharp moves invariably are in the same direction of the trend, in this case, up.

The AUDUSD has also been riding on the coat tails of the NZDUSD since June 5th when the ECB lowered rates to negative and drove the market to search for yield. The AUD has the second highest interest rates in the OECD. The outlook remains positive for the AUD against the major currencies and unless the RBA lowers rates. It appears astounding that the RBA maintains a somewhat hawkish position on rates per their statement release on July 1st and this will only serve to work against them. The market is slowly building bullish momentum and a push towards parity would appear likely, as long as they maintain that stance, which took the market by surprise. They may well be creating a problem they will have some problem dealing with shortly, if the currency continues to push higher.

Australian Dollar Analysis

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