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Aussie Dollar - Prepare to defend yourself

CMC Markets

Sorry about the title everyone - it kind of got away from me there. Anyway it's not entirely irrelevant. Whilst I try not to personalise markets too much I think we are approaching some decidedly interesting price levels at the moment so it could be a bumpy ride. When Europe was at its most dire and bumbling along with some economically perilous outcome or another waiting to strike like an angry viper the AUD was one of the places where the world was happy to put its cash. The tables have been turned to a small extent now. With Mario Draghi at the helm it seems that European countries may be able to borrow for the next few years at a reasonable rate. Talk about a breath of fresh air for the market. Australia at the same time is hung over due to a sudden realisation that the iron ore market may not be headed to $200 a tonne in the next week or so.

The question that gets asked next is of course - 'How far will the Aussie fall?'

The solution to this is to look at historical support levels and draw a conclusion as to likely points from that. I suggest however that you look at volatility based support and resistance levels though as I find them to be much more fluid over time (as you would imagine). I actually want to look at the AUDEUR because I think both economies are in a state of great change at the moment - but not all good or all bad despite what you hear.

As you can see on the chart above the touches of the 200 day moving average or its volatility bands have often been a sign of a turning point in the rate. As you can also see we are getting close to that level now. I am a very big fan of the work of Mark Whistler and he suggests that reversion to the mean occur as a sign of uncertainty in the market. When we are well away from the mean (outside the volatility bands) then the view of the market is more closely aligned. Give the circumstances that we find ourselves in now economically you would suggest that uncertainty is indeed very high. So the first step on this pair will be to look for support forming if price gets to the 200 day average.

On balance of probability I think that it will given the robustness of the trend. However if the AUDUSD breaks out of its range (~<0.97) then I think you would start to take on a whole new view of where we are headed to.

On the hourly chart you can see a very consistent trend in place. If you look you can see that the -1.25SD band of the 200 and the 50 MA are closely aligned with one another. This will be a likely resistance level in the short-term so set a price alert. I have been astonished that the AUD has been as positive as it has been after this mornings employment data - were it up to me I would have thought the AUD would have slid on the news but there you go.

Happily given the title it gave me an excuse to dig up a quote from one of the finer moustache wearers the world has known - though sadly not wearish it in this film.

[youtube http://www.youtube.com/watch?v=YlOxiwGLAkY?feature=player_detailpage]


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