A thorough monthly overview of the Australian Dollar - March 2011

As this happens to be my post number 100, I would like to dedicate it in exclusive to a thorough analysis of the Australian versus American Dollar, AUDUSD, which is the pair that I mostly trade. The other monthly analysis for the remaining 11 pairs will be presented as usual in my next article.

Although the charts were taken approximately one hour behind the monthly close, we can clearly see a series of patterns that have formed in this pair, especially along the last three years or so. The first leg of the bullish trend started in July 2001 with an almost perfect 45-degree ascension till March 2004 where it made a 38.2% correction and continued till July 2008 though at a slower pace and a less steep 30-degree angle, with a relatively long consolidation period between November 2004 and March 2007.

We all know that August 2008 was a selling debacle for all USD-bearish pairs and USDJPY while the USDCAD and USDCHF experienced enormous gains, with an overall repercussion on the other non-directly related markets. At that point, the Aussie started a deep correction which ended at the 76.4% monthly Fibonacci retracement, on October 2008, marking the bottom of a bigger ascending channel. After a wide-range consolidation which lasted into April 2009, the ascension resumed with strong momentum and a steeper angle (around 66 degrees) till November 2009, which high at 0.9404 marked the upper point of the subsequent rising wedge that we can now appreciate on the charts. A 38.2% Fibonacci correction took place then, marking the lower point of the wedge at 0.8065 on May-June 2010, and thanks to the continuous improvement of Australian rates, the bullish trend continued with the same steep angle up to the all-time highs at 1.0255 two months ago (December 2010), pretty much close to the actual price.

Now we have a rising wedge inscribed in a bigger rising wedge which is itself contained inside the bigger ascending channel, and a series of key turning points which we are going to watch in a more detailed view of the chart.

Price closed February 28 slightly below Monday highs, at 1.0183. It has since made a new attempt towards the highs and broke 1.0191 reaching 1.0200 level, barely piercing a 30-minute trendline upper channel and from which it is presently correcting a 50% of yesterday’s gains (1.0160). Price is now hovering just below the key level 1.0166.

Given the actual extreme bullish positions in the market, I believe there is still steam in the Aussie to reach further highs, although we have to exert caution precisely because if everybody is buying, at a certain point there will be nobody left to buy from, thus the profit taking can start fast and with a fair volume.

As you can see in the comments on the charts, we have several possible turning points as follows:

1)      Another attempt to break psychological level 1.0200

2)      Previous higher highs at 1.0255

3)      Upper line at the top of the rising wedge, at 1.0370

4)      Next step would be the confluence of the middle Pitchfork line and the upper line of the bigger channel, at 1.0952 and inside a resistance zone between the 127% and 138.2 Fibonacci extensions on previous monthly swing high (1.0830/1.1091).

5)      Finally, an AB=CD projection could lead this pair to psychological level 1.1500 (purple lines – point labeled “D”), near the 161.8% Fibonacci extension on the actual swing high.

On the downside, we would have to break the wedge first, and I would favor the following:

1)      First target around 0.9847 which is the bottom line of the wedge and July 2008 high (remember that we are speaking of longer term here)

2)      Support at 0.9536 which is December 2010 low and is near the 38.2% retracement on the recent swing high

3)      Further down, the bottom line of the Pitchfork channel at 0.9500

4)      Then, support at November 2009 high, price level 0.9404, also near the 38.2% retracement.

On a much longer term bearish approach, we have the baseline of the bigger wedge around the 50% retracement,  near 0.9160,  and thereafter May-June 2010 lows  coinciding with the lower trend line of the ascending channel, at 0.8065, and even lower the retest of October 2008 lows. However, I personally think that, given the Aussie’s carry power, USD continued weakness and if there is no significant decrease of the actual interest rates,  we would be hovering around 0.9500/0.9400 as a maximum to then resume a bullish move once and again, to reap benefits from the positive swaps and the amazing strength of the Australian currency.

On the actual bullish momentum, I think that the top of the wedge could be an ultimate high by now, and favor 1.0290/1.0300 as strong turning point if all-time highs are broken, but we could also have a push to psychological number 1.0400 if bulls aren’t yet prepared to unwind the carry and can hold their profits for a greater reward.

Beware of Black Swans, though. They usually swim in the dark, when no one is expecting them…