Trading Forex - what is next for Australian Dollar.

Trading Forex - what is next for Australian Dollar.

by Mike P. Kulej

This is a follow up to an article "Australian Dollar top" from late May this year. That article pointed to a major top forming on longer term charts and a strong possibility of a meaningful correction to 0.8600-0.8500 area in the AUD-USD pair. This target has been achieved in a very short time indeed.

At the time previous article was published, AUD was still a high flying currency. Most other ones had already slipped off of their highs against the US Dollar. New Zealand Dollar, Canadian Dollar, Swiss Franc and British pound had weakened a few weeks, or even months, before. By contrast, Australian Dollar was still making new higher highs. Ultimately, AUD also fell and did it by loosing 1200 pips in about five weeks. That's some move.

What is important to mention is that Aussie didn't simply join other currencies and weakened just against the USD. It was sold off broadly in all its crosses. Some of these losses were very large. EUR-AUD ran up over 1000 pips, AUD-JPY fell about 1000 pips as well. Even less moving crosses like AUD-CAD and AUD-CHF dropped 700+ and 500+ pips respectively. Perhaps most telling of all is the slide in AUD-NZD- over 800 pips!

All this despite interest rates of 7.25%, which gives AUD a positive rate differential in comparison with most other major currencies. As we have noticed, however, this hasn't been a strong factor in Forex trends this year. This is true for most other currency pairs, not just Australian Dollar crosses. One undeniable reasons behind AUD fall are softening prices for physical commodities. Oil, grains, gold and other metals have all retreated from their highs. Aussie, being a "commodities currency" was certainly influenced by these developments.

What can we expect next? From a fundamental point of view, this currency should continue its downward momentum. General consensus is that prices for raw materials should soften even more. Most major countries are reporting slowing down of their economies. This will put even more pressure on prices of commodities, leading to a cool down of Australian markets and farther weakness of AUD.

Fundamental analysis are very helpful in identifying broad trends, but of not much use to place actual trades. In order to decide on a potential trade parameters, like entry price, stop level and target, one has to use technical analysis. More precisely- charts. At the very least, fundamental outlook should be employed in conjuncture with charts, not as a stand alone tool.

As of this writing AUD-USD is just above 0.8600 level. This pretty much completes the first leg of the of the down move. Weekly and daily charts indicate sideways movement, with a correction of perhaps to as high as 0.9000 area, before the bear market resumes. Once that happens, second leg of the down move should resume with prices ultimately heading as low as 0.7800-0.7700 level. Projected time frame for this move is 4-6 months.

If the price progresses as expected, situation should be reevaluated once that level is reached. In the meantime there may be plenty opportunities to trade both sides of the market. As long as one remembers that longer term bias is to the down side. When that move comes it might just be as fast and steep as the last one. Stop loss is a must for any buy trades.