AUD/USD suffered further sell-off on Thursday, reaching a low of around 0.916. Since then, price has been trading relatively stable, trading sideways for most part of Friday above 0.92 and below 0.925. Price continued the trend early Monday morning, with 0.925 holding and price finding some support via the marginally rising trendline. The reason for AUD/USD apparent stability isn’t immediately apparent, but a case could be made that price is stable as a result of extensive selling activities for the past 5-6 weeks. Furthermore, USD weakness is creeping in slightly after Wednesday’s sudden increase in strength. Just as US stock markets rebounded slightly on Friday, USD gave back some of the increase, which net off with the weakness in AUD to allow AUD/USD to trade flat.
Fundamentally, we do know that Australia’s economy is going down and the outlook isn’t positive given China’s weakness. What is currently uncertain is where USD will be able to go from here. It remains to be seen whether Wednesday’s rally in USD is a one time correction or a longer-term correction that will bring USD back to pre financial crisis/QE1 levels. It should be noted that QE1 and QE2 did have an ending, and that did not stop USD from continuing to weaken back then, hence the same argument could be used here. The strengthening of USD hence could be interpreted as a one time correction due to the overt weakness brought about by speculation of a never-ending QE3. Traders expectations tend to drive markets more than current fundamentals, and even if QE3 stops by mid 2014, it is easy to imagine traders expected a QE4 or maybe even a QE5 if US unemployment rate fails to hit below the 6.5% goal.
However, there are arguments against the above assertion, as it is exactly due to Fed’s confidence that the 6.5% goal can be reached which prompted Bernanke to reveal the potential exit timeline. If that is the case, past behaviors of USD post QE1 and QE2 ending cannot be a reliable estimate of what may happen this time round. If you find the conflicting explanations confusing, do not worry, as there is a chance that market is confused which explains current sideways behavior in AUD/USD.
From a technical perspective, current bias remain towards the downside. Price has tried to enter into the Ichimoku downward trending Kumo but has been rebuffed twice. However it is worth noting that there is bullish Kumo Twist ahead, and given that the marginally rising trendline is still in play, should price maintain current 0.92-0.925 range, it is possible that we could see a bullish breakout from current Kumo given that the thickness of Kumo has diminished significantly going forward. Stochastic readings also suggest that a move up is possible with a trough forming just under the 50.0 level, something that we’ve seen just recently on 19th Jun – the bullish recovery towards Kumo bullish breakout that was unfortunately cut short thanks to Bernanke.
The same could still happen again, and price would still need to break above 0.93 in order to banish the huge shadow cast by the Jun 20th long bearish candle. Trading above 0.93 does not necessary change the bias to bullish, but puts bulls in a better position for a stronger recovery higher. Ultimately price would need to clear above 0.945 in order to negate the post Fed decline.
It is interesting to see the price has stalled after breaking the descending Channel, instead of engaging in quick bearish acceleration. This is in line with the earlier assertion that bears may have overextended themselves. If 0.92 holds, price will trade into the Channel back again by midweek, and opens the possibility for a move up to 0.94 round number which is the confluence with early June support and Descending Channel Top.