Following the extended bearish phase for the AUD/USD the question that everyone is asking now, is whether this trend has run its course, or are we witnessing a pause before continuing lower once again? To answer this question, we simply need to consider the volume and associated price action on the daily chart, which is now developing a classic formation.
The first point to note is that throughout the bearish trend lower during May, which was dominated by down candles, the red volume bars were rising and rising consistently, a strong confirming signal of a genuine move. In early June the volume on the down candles began to approach extreme levels, and on the 11th June came our first signal of stopping volume and a potential buying climax at this level, with extreme volume on a hammer candle, following the doji candle of three days earlier, which again was on extreme volume. These are both early warning signals that the market makers are moving in at this level in preparation for a period of sideways price action, before breaking higher and reversing the trend.
The first clear signals have now been posted, and with this clear volume profile now in place, expect to see the pair consolidate in the 0.9400 to 0.9650 region, as the buying climax develops, which will then be followed by a breakout higher, through this region, and back to test the 0.9800 region in due course. No doubt in this phase we can expect to see some low volume tests following the breakout, as the market prepares to rally higher. The volume at price is also building a nice platform of support in this region, which will help to provide the springboard for the move. Any breakout, should be associated with above average volume which will then validate the move with the market makers joining in as the bullish trend develops.
From a fundamental perspective, the recent bearish phase of price action has seen the Aussie reflect the flow of money away from high risk, and into low risk. As you might expect the AUD/JPY and the AUD/USD are almost mirror images of one another, as the carry trade effect dominates the price action for the Aussie, which continues to remain one of the higher yielding currencies in these ‘low interest times’. The AUD/JPY is, after all, a fulcrum of risk.
This assumes that Uncle Ben has learnt his lessons from last month. During the second world war it was – ‘careless talk costs lives’ – that was the watchword. For Ben, it’s the same sentiment, but as his predecessor Alan Greenspan once said : ‘If I seem unduly clear to you, you must have misunderstood what I said’ – so perhaps we are doomed to Fed Chairmen who delight in being vague and lacking in clarity. Either way, the markets and more importantly the market makers, now appear to have absorbed the fact that ‘ all good things must come to an end’, and the Aussie dollar in particular looks set to reflect this sentiment, as risk appetite returns once again.
By Anna Coulling