“Little Aussie Battler” no more

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The Australian dollar has been much in the news over the last couple of weeks, with the alleged role that it has played in the demise of Holden and other Australian manufacturing companies. Also, RBA Governor Glenn Stevens has used commentary in attempts to talk down the ex “little Aussie battler”.

Let’s consult a 10-year weekly chart of the Australian dollar against the US dollar. There are two major support-resistance zones that are shown with bold blue rectangles. These two support-resistance zones align with two major 50% retracement levels, which are shown by the top and bottom magenta ellipses.

Chart reproduced with permission from Beyond Charts www.beyondcharts.com

The AUD/USD is most definitely in a downward trend, which started in April – July 2011. There was a fairly strong support level around US$0.98 to US$0.96 area (top blue rectangle), which the AUD broke below in June 2013. This was a major signal of further weakness to come in the AUD. However, true to the way that price action typically plays out, the AUD rose back to test that previous support zone, which can be seen on the extreme right of the above chart.

When previous support zones are tested, price can either break above the previous support level, and resume the prior up-trend, or this level can become a resistance level and the price falls and continues its down trend. Either could have occurred at this junction. Thankfully for most in Australia (not importers!), the AUD has continued its down trend.

Where to now?

The big question on everybody’s lips now is: will the Aussie continue falling or rise again? The chart above shows that there is a high probability that the AUD/USD will continue to fall to around the US$0.79 – US$0.80 zone and on the way down take a breather around the US$0.85 level, as shown by the middle magenta ellipse.

The US$0.79 – US$0.80 zone has previously been a resistance zone in the period from 2003–2006 and then a support zone in 2007 and again in 2010. Many in Australia would welcome the AUD falling to these levels against the USD.

However, commodity prices could spoil the party. The chart below shows a base reference comparison between the AUD/USD (red and green line) and the Continuous Commodity Index (CCI) from March 2006, the latter of which I reviewed two weeks ago in the Switzer Super Report.

Notice the close correlation in the direction of the CCI (blue) and the AUD/USD. In fact, since 1991 there has only been a single 15-month period from July 1999 to October 2000 where the two did NOT move in the same direction.

Chart reproduced with permission from Beyond Charts www.beyondcharts.com

You may recall from two weeks ago that the CCI is approaching an apex in the next few weeks, where it could rise or fall quite sharply on the back of either a breakout or a breakdown in the CCI.

If commodity prices do rise, there is a high probability that the AUD will rise again against the USD, in which case the US$0.98 – US$0.96 zone might get tested again. If commodity prices fall, there is a high probability that we will see a lower AUD, in line with the analysis provided in the first chart above. It is unlikely, but a low probability exists that the two will move in opposite directions.

On the one hand, Australian stock market investors would like to see the resources sector rally again and see higher prices in BHP, RIO and small to mid-cap resource stocks, but on the other, also see a weaker AUD. From the analysis provided here, it is unlikely that we will see resource stocks rising and the AUD falling simultaneously.

Gary Stone is the founder and Managing Director of Share Wealth Systems www.sharewealthsystems.com. He regularly appears on Sky Business TV shows Switzer and Your Money Your Call discussing charts and technical analysis.

Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances.

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