A parting of the clouds - the Australian dollar soared last night

Market Analysis /
Greg McKenna / 11 May 2018

The Australian dollar rocked through resistance in the 0.7470's yesterday afternoon before roaring into the 0.7530's where it sits this morning - up around 1% - after what's been a volatile evening. 

So it has been a superb move for the Australian dollar as the clouds parted and a combination of a weaker US dollar, higher commodity prices, and risk appetite on the back of the stocks rally helped lift the battler. It outperformed other pairs because of this favourable combination and thus the Aussie is back at the 0.7530/40 region of resistance I highlighted in my daily AUDUSD note yesterday.

The question though its what's next for the USD. So, it is worth rehashing what I said in the Forex section of markets morning about the USD earlier. 

We might finally be getting the USD reversal, this second wave against the tide of USD strength, that I have been looking for in order to set some longer-term positions. Earlier this week I highlight the DXY had become extended in terms of the dailies and even the weeklies. So while we hadn’t seen a consolidation yet the chances were rising.

Of course the seemingly benign US CPI inflation last night, coupled with this short-term overbought status for the dollar provided the catalyst for the USD to sell off, for the Euro to rally, and for the Aussie dollar to surge. But this was expected. Prices that go straight up, or straight down (other than stocks on the way to zero) usually always have a hiatus of some sort. It comes in two forms.

Either a time consolidation where we see an extended period of sideways range trading. Or, alternatively, we see a price consolidation where the elevated, or collapsed, price of the asset moves back toward the 38.2% retracement of the most recent move.

In many respects, this is an Elliott Wave approach. I’m not really an Elliott waver, but I do believe we see trends (tides) in asset prices which then have waves that flow against the tide. And I believe that this is a fractal in nature – that is it happens in all time frames, big and small. Anyway, that’s all my way of saying this USD move likely has some legs to the up move but is likely to experience a reversal at the moment.

And that means that the Aussie's rally, or failure, is being set elsewhere in markets. And in that sense it is simply a residual of other moves.  Another day of stocks rising, and another day of USD reversal and the Aussie can easily get to 76 cents. Though the 0.7566 region is the 38.2% retracement of the most recent downdraft.

Support is at 0.7490/94 and then 0.7470/74. 

Here's the daily chart of the AUDUSD

Click on me, I'll expand
Click on me, I'll expand

Have a great day's trading.

Greg McKenna

Chief Market Strategist


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