As we have already covered on many occasions here on this blog, the US dollar (USD) – also known as “the greenback” – has been rising steadily now for well over two years. In particular, this has been true against the Australian dollar (AUD), which has seen a rather prolonged sell-off, frustrating Australian consumers but benefiting export-oriented businesses.
In recent days, however, we have seen how the situation has gone from bad to worse for the Aussie dollar, while the Greenback has accelerated its gains, as the daily chart of USD/AUD shows.
The US dollar is, as we speak, on the verge of breaking through the psychologically important 1.5 level against the Aussie dollar. And as always with break-outs on charts, previous resistance levels then become areas of support. We may, in other words, see an even stronger US dollar in the time to come.
Zooming out to look at the very long-term chart of the USD/AUD – where one bar represents one month of trading – we can see that the price is now close to levels not seen since the 2008 financial crisis.
The question now is obviously if the price will continue to rise even further, or if the major resistance area at around 1.55 and 1.56 will hold. And to answer long-term questions like this in the forex market, it’s necessary to look to the fundamentals of the market.
US dollar as a safe haven
There’s little doubt that the surge in the US dollar over the past few years can be seen as a flight to safety by investors. In many ways, this also has a lot to do with the surge in Swiss francs – another classic safe-haven currency – which we have talked about previously.
Although the world economy as of right now seems to be doing alright, there are worrying signs on the horizon. Most importantly this time around is the panic that have spread throughout Asia and much of the rest of the world as a result of the Wuhan coronavirus outbreak.
The virus outbreak has already made a significant impact on the Chinese economy, and it is feared that when the true extent of the impact becomes clear, it will turn out to be more than what stock markets are prepared for. China has come to a literal standstill as a result of measures taken to stop the transmission of the virus, and it is clear that such a situation cannot last for long before its effects will be serious for the world economy.
For countries like Australia, which derive much of its revenue from commodity exports, a standstill in China may lead to dramatic consequences. And this is what we can see is playing out in the forex market right now, with – among others – the USD/AUD surging higher.
Although some industries in Australia may suffer as a result of a slowing Asian economy, it’s important to remember that with every crisis comes an opportunity. This time, the opportunity lies in learning to trade to take advantage of strength in traditional safe-haven currencies such as the USD.
The most obvious trade to make now would be to buy USD/AUD on a break above the 1.5 level. If that level breaks – defined by a daily price candle closing above that level – there is a chance for this pair to run much further. And that’s an opportunity you don’t want to miss.
The best way to take advantage of break-outs to the upside is to buy on the re-test. The re-test occurs when price surges through a level, only to fall back again shortly after, and then bounce back up. When that happens, take it as a sign that previous resistance has now become support.
In a classic trend-following trade like this, you may choose to exit again based on a pre-determined target price, or simply follow the price higher using a so-called trailing stop.
Whichever strategy you choose for the trade, the most important thing is that you stick with your own plan. Don’t change the rules while you are in the game, and try not to move your target price. In trading, as in many other parts of life, discipline and sticking to your plan is key to success!