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Bullish Commodity FX as Ichimoku Support Holds & Sentiment Deepens

Bullish Commodity FX as Ichimoku Support Holds & Sentiment Deepens

2015-12-01 18:50:00
Tyler Yell, CMT, Currency Strategist
Share:

Bias: ST Bullish Commodity FX as Ichimoku Support Holds & Sentiment Deepens

Point to Establish Long Exposure: Above Support at 0.7170

Spot: 73.12

Target 1:73.81 October High

Target 2:74.90 Equal Wave Pattern off August-October-November Extremes

Invalidation Level:Close below 0.7169 (November 30th low)

Highlights:

-RBA clears air for AUD buying, as Stevens passes opportunity to talk down ccy

-FXCM’s Trading Book Shows That Upside May Continue Yet.

Fundamental & Technical Focus:

Commodity currencies have been outright impressive over the last five days, but none more impressive than the Australian Dollar. Since October 30th, the Australian Dollar is outperforming the 2nd strongest currency in the G10, the US Dollar, by ~2.5%. Last night, the Reserve Bank of Australia decided to hold off on cutting rates and talking down the currency. This gave both the Australian & the New Zealand Dollar reasons to go bid and now the New Zealand Dollar is on its best 2-day streak since its massive performance against the US Dollar in October. We recently talked about resistance that AUD/JPY was coming into, but the Australian Dollar sailed right through the awaited ceiling.

The seasonality argument can also be helpful this time of year. In short, the seasonal tendencies are for riskier assets to rally into year-end. One statistic that has been making rounds today is that since 1928, the SPX500 has never had December be the worst month of the year. Additionally, since 2002, the SPX500 has not closed in the negative for the month of December alone. The Australian Dollar provides a higher yield of 2% than most other currencies so the same attitude that causes the SPX500 to move higher can positively affect the Australian Dollar. Consequently, the US Dollar is a poor performer historically in the month of December. If this seasonal tendency arises again, then AUD strength may be a theme worth getting comfortable with over the next few months.

Chart:

Bullish Commodity FX as Ichimoku Support Holds & Sentiment Deepens

Technically, a few points stand out to me, least of which is that price, and momentum (green line) has broken above the Ichimoku Cloud for the first time since May. Additionally, an Andrews Pitchfork price channel (blue) shows median line resistance that aligns with a break of the 1st resistance level. Should the lower blue pitchfork line hold as support, a move toward the target is increasingly likely.

In addition to Andrew’s Pitchfork & Ichimoku cloud providing support, the 100-day moving average is providing support and was a launching pad for the current move at 0.7190. Now, smaller moving averages can be used to buy pullbacks such as the 34, 21, or 13-dma.

An important note is that the Australian dollar and all other currencies in the G10 are likely to experience heightened volatility this week. As Christopher Vecchio recently pointed out, EUR/USD Prepares for its Most Important Week in Months (If Not Years!). This volatility can and likely will spill over to other currencies. In the current context, it appears any short-term weakness could be an opportunity to enter at a better risk: reward ratio.

AUD/USD -- Re-claims 100-DMA as bulls regain control

2nd resistance: 0.7490 Equal Wave Move Higher of Aug. /Oct. /Nov. Extremes

1st resistance: 0.7364 Oct. 15 high

Spot: 0.7320

* 1st support: 0.7160/57 55/21-DMA’sTrade Setup:

* 2nd support: 0.7067 Nov. 18 low

Sentiment (per our Speculative Sentiment Index):

Bullish Commodity FX as Ichimoku Support Holds & Sentiment Deepens

The ratio of long to short positions in the AUDUSD stands at -1.65 as 38% of traders are long. Long positions are 7.2% lower than yesterday and 9.1% below levels seen last week. Short positions are 14.9% higher than yesterday and 20.7% above levels seen last week. We use our SSI as a contrarian indicator to price action, and the fact that the majority of traders are short gives asignal that the AUDUSD may continue higher. The trading crowd has grown further net-short from yesterday and last week. The combination of current sentiment and recent changes gives a further bullish trading bias.

The Trade:

I am looking to buy AUD against weaker currencies like GBP, EUR, CHF, and potentially USD if data this week continues to disappoint. I would like to buy closer to support as opposed to on an extending move higher. Upon this buyable pullback, a stop below the November 30 low of 0.7160 would be the first risk management level. The target is at 0.7490, which is the equal wave move higher. This target aligns with a favorable risk: reward ratio that our Traits of Successful Traders report found to be one of the best things a trader can do to ensure long-term sustainability in your trading.

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

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