Saxo Bank head of equity strategy Peter Garnry has been calling for a turnover in surging macro data for some time, and with the economic surprise index at a 14-year high, it might be time for a correction.
Article / 19 September 2012 at 7:10 GMT

AUDUSD in an interesting pivot zone

Head of FX Strategy / Saxo Bank

The technicals for AUDUSD are deliciously complicated, though the current pivot zone is an interesting area for bears to test their case as it’s fairly straightforward to see where they will be proven wrong.

I’ve talked down the Aussie of late, and haven’t been alone in doing so, as it is quite clear that the country faces severe challenges as key commodity prices – particularly for iron ore – have fallen and the growth outlook for China looks rather uncertain, not to mention domestic factors like a falling housing market and other credit bubble unwind risks. This week we also had the RBA clearly guiding forward expectations for the G10’s highest yielding currency lower as well. Indeed, over the last several weeks, the Aussie has moved lower if we look at it versus the G-10 as a basket (see the chart I posted yesterday), but AUD remains near the top of the range against the USD due to the latter’s weakness and strong risk appetite.

Of course, holding back the Aussie from what would otherwise be a collapse against safer haven currencies is the trigger of the recent surge in risk appetite: the humming central bank printing presses in the US and now in Japan, where the BoJ overnight said that it would print another ¥10 trillion (over AUD 130 billion) for asset purchases. So the Aussie will have a hard time correcting more significantly lower and returning to a more reasonable valuation across the board until global markets decide that QE to infinity is not the elixir it hope it would be.

The AUDUSD technicals are deliciously complicated. We have had two significant overhead lines of consolidation recently. The lower one was broken intraday last week, but we got a nice shooting star rejection of that break on Friday, the day after the FOMC announced QE3. This is perhaps the dominant short term hope for the bears, who have some room to play with up toward 1.0500 (weekly pivot right around that level) before any worry starts to set in. Better confirmation that the highs are in for now would come with a move back through the 55-day and 200-day moving averages.

To the upside, hope would begin to fade for the bears if the pair rallies back through 1.0500 and then retracement Fibo’s like the 0.618 at 1.0542. And bears should definitely run for cover in the bigger picture if 1.0650 or so is taken out, as this is the line of consolidation that stretches all the way back to mid-2011 and would suggest that a potential major move higher is in the works. Long story short: attractive levels here to test the bearish case as it’s easy to see where we would be proven wrong.



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