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AUD/USD - Looking Past the Volatility

AUD/USD - Looking Past the Volatility

Research, Research Team

As the short and long-term perspectives offer contrarian views on the future of the AUD/USD, here are the key levels to watch.

Key Takeaways:

AUD/USD has been volatile throughout 2014.

• Short term charts suggest there may be some short term upside remaining in the pair.

• Longer-term charts suggest the downward trend is not yet over.

Since the beginning of the year, AUD/USD has been somewhat volatile in its movements. From January highs just shy of 0.9100, the Australian dollar collapsed to same month lows below 0.8700, before recovering the loss in its entirety by February 12th. These seemingly random fluctuations have left traders asking, "What's next?" Let's take a look at the charts to see if they offer up any clues.

AUD/USD Four-hour Chart

AUD-USD-Looking-Past-the-Volatility-0013_body_Image39.jpg, AUD/USD - Looking Past the Volatility

First, take a look at the four hour chart above. This timeframe shows this fall-rise action of the last month and a half in detail. There are a number of key levels highlighted. The first of note, the 0.9000 level around which price currently sits, is a key psychological resistance level that has caused a number of reversals in the past. The short-term direction of the AUD/USD will likely be decided at this level. If price can break, and close above, 0.9000, expect further rises up towards previous resistance at 0.9065-0.9075. Conversely, if price fails to break 0.9000, expect a downwards move initially as far as 0.8936-0.8964 and, beyond that, perhaps as far as support/resistance at 0.8870-0.8880.

Another point worth mentioning is that during Monday's trading, the 50 period moving average crossed above the 200-period moving average. Institutional and retail traders watch both of these moving averages, and when the shorter term (50) crosses above the longer term (200) it can be an indication that a downtrend is losing momentum and reversing to the upside. The last time such a crossover took place in this pair was back in September 2013, and it preceded a 400-pip uptrend.

AUD/USD Daily Chart

AUD-USD-Looking-Past-the-Volatility-0013_body_Image41.jpg, AUD/USD - Looking Past the Volatility

Now take a look at the daily chart above. While the bullish moving average crossover suggests there may be some upside to the AUD/USD short to medium term, the daily charts offers up a different picture for the long term. The first point of note is that the 50-day moving average is below the 200-day moving average, which on a daily chart indicates that price is currently in a long-term downtrend.

Two key levels are highlighted. Just as price action around the 0.9000 level will likely decide the short-term direction of the pair, action around these two levels will likely decide its longer-term direction. The first is support/resistance between 0.9045 and 0.9075. Price reached this level on Tuesday and Wednesday this week, and promptly reversed to the downside. If the AUD/USD cannot close above this level over the next week, this will support the bias offered up by the moving averages and suggest the longer-term downtrend is still in place. The next key level is at 0.8864-0.8900. The most recent dip aside, this level has served as strong support on a number of occasions. If this turns out to be the case, expect a medium term range between this support and the aforementioned key support/resistance level. If, on the other hand, price breaks and closes below this level, expect further declines initially as far as support at 0.8700.

Finally, one other factor supports a longer-term bearish bias. The commodity channel index (CCI) indicator identifies levels at which an asset might be overbought or oversold. When it crosses back above or below these levels, it can signal buying or selling opportunities. The CCI for AUDUSD crossed below the overbought +100 level yesterday, which could indicate a selloff and, in turn, more Australian Dollar weakness.

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