Tuesday, August 19, 2014

The resilience of the Aussie dollar | A TA probe to the downside

Reserve Bank of Australia (RBA) governor Glenn Stevens appeared before an Australian government committee last night (GMT) and, once again, attempted to signal that the Aussie dollar should be at a lower exchange rate than it currently is. In a Q&A session he said “…the risk of an Australian dollar fall is underappreciated”.

And, indeed, it does seem overvalued given the fundamentals: an economy that is transitioning, with a level of uncertainty, from being mining and commodity export based to one that relies on local consumption; an unemployment rate that is rising, albeit still low by global standards; a sky-high cost-of-living; and a reduction in the terms of trade, or the surplus of export dollars over imports.

But hindsight is a wonderful thing. It now appears that the Australian currency has been uncommonly resilient on the back of a demand for Australian sovereign bonds, and a concomitant willingness on the part of the Oz authorities to issue them (to buy Australian bonds, investors must first change their currencies to Australian dollars). After all, the country is still one of the few that enjoys a triple A rating on its debt. And, even at 2.5%, which is historically low, the base rate is still many times that in all other major economies, where they have gone to effectively zero. Truly, in the valley of the blind, the one-eyed man is king.

AUDUSD probing to the downside

Having said all that, the Forex market has the capacity to confound when any view has been taken on rate direction. And, from the Technical Analysis (TA) standpoint, the Aussie dollar now seems to be tentatively probing a move to the downside. It can be seen from the chart above that AUDUSD dipped below its 200 day Exponential Moving Average (EMA) recently. It has also embarked on a possible series of lower highs and lower lows, the characteristics of a down trend, should one be in the making.

While we have not been particularly active in our trading during the quiet and choppy holiday season, as we do not chase the market  - enter it just for the sake of being in it - we have been carrying out historical and real-time simulations. In this connection the Mandelbrot routine took a position on the short side in AUDUSD. While it does not use the 200 Day EMA in its algorithms, it is interesting that this move coincided with the fall below that indicator. Mandelbrot quickly drew in its horns, however, closing out for a tiny loss (0.0593%) when price once again moved against the position it had taken.

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