Australian Dollar traders should keep a close eye on the relative health of key equity indices; whether or not the past week’s rally is the start of a larger recovery or a simple short-term correction will be critical for the AUDUSD. The S&P 500 saw sharp declines as it peaked through mid-April and slid to fresh 9-month lows just two weeks ago. A subsequent correction leaves it considerably off of its trough, but sharp rallies have left it well-short of its secondary top through mid-June. All else remaining equal, bearish medium-term momentum favors Australian Dollar losses. Yet the past week makes it clear that relatively illiquid summer trading conditions can lead to sharp and unexpected price moves in a near-instant.
Given sharply bullish momentum in the very short-term, however, we would not bet against further Australian Dollar recovery just yet. The pair currently trades near its highest levels in two months, and a test of a secondary top near the $0.8860 mark seems likely. Short-to-medium-term direction may very well depend on whether the Aussie Dollar is able to test and break said level. Absent a sharp rally, broader price trends may very well favor another week of declines for the recently-choppy AUDUSD. - DR
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