Australian and New Zealand Dollars: Risk of Major Tops Near Current Levels

Australian Dollar / US Dollar

On 3/23, 3 month 25 delta risk reversal rate for the AUDUSD reached a level last seen on July 15, 2008 - the exact day of the top at .9850.  The higher the risk reversal number, the more bullish options traders are.  Extremes in bullishness (high risk reversal level) and extremes in bearishness (low risk reversal level) correlate with tops and bottoms in price.  In this case, the data suggests that a top is either in place or very close to in place for the AUDUSD.

Australian Dollar / US Dollar

The decline from the 2008 top to .60 in the AUDUSD is in 5 waves and just as importantly, the rally from .60 is in 3 waves.  The 5 / 3 pattern confirms that the larger trend is down (5 waves move with the trend and 3 wave against the trend).  Of course, larger more complex corrections can and do occur (notice the alternate labels at the bottom of the chart - W, X, Y).  Near term, a push above .7093 may be required in order to complete a c wave from .6245.  This would present an opportunity to go short against .7275 in anticipation of the long term decline resuming.

New Zealand Dollar / US Dollar

On 3/23, 3 month 25 delta risk reversal rate for the NZDUSD reached a level last seen in December 2007, when the NZDUSD topped out at .7937 and fell to .7383 a month later.  A subsequent high was reached before the ‘real’ top was in place however.  In this sense, the AUDUSD risk reversals proved to be much more accurate than the NZDUSD risk reversals.  Still, there is benefit to identifying a top of some degree and risk reversals for the NZDUSD warn of a top, even if it’s not the top (and it still could be) forming now.

New Zealand Dollar / US Dollar

In the NZDUSD, an impulsive (5 waves) decline formed from the 2007 high at .8219 to the November 2008 low at .5186.  Like the AUDUSD, a 3 wave correction followed and ended at .6090.  The down, up sequence since then is viewed as waves 1 and 2 of the next bearish impulse.  Near term, a push above .5753 may be required in order to complete a c wave from .4890.  This would present an opportunity to go short against .6090 in anticipation of the long term decline resuming.



Jamie Saettele publishes Daily Technicals every weekday morning (930 am EST), COT analysis (published Monday mornings), technical analysis of currency crosses throughout the week (EUR on Tuesday, JPY on Wednesday, GBP on Thursday, AUD on Friday), and the DFX Trend Index every day after the NY close.  He is also the author of Sentiment in the Forex Market.

Please send comments about this report to jsaettele@dailyfx.com