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Australian Dollar Forecast Has a Systemic Break But How Far Out Is It?

Australian Dollar Forecast Has a Systemic Break But How Far Out Is It?

2019-12-07 15:00:00
John Kicklighter, Chief Currency Strategist
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Australian Dollar Technical Forecast Talking Points:

  • Most Aussie Dollar crosses reflect the short-term volatility but restricted run of AUDUSD
  • While there has been some productive range for AUDUSD, the 5-week ATR is the lowest in 17 years
  • The correlation to the USDCNH and US-China trade wars may provide the long-feared spark

What do the DailyFX analysts expect for the Euro through the fourth quarter of 2019? What about the other majors, indices and commodities? Download our free Q4 Forecasts - Fundamental and Technical on the DailyFX Free Trading Guides Page.

Technical Forecast for Australian Dollar: Bearish

The Australian Dollar has experienced some meaningful switchback in imperfect ranges through most of its crosses these past few months, but the activity belies a pressure build up. While most would focus on the growing definition of technical boundaries for the likes of AUDUSD over the past four months – reasonable for the average person’s trade duration – it is important to reflect upon the big picture. When pulling out to a weekly or month chart of this benchmark cross, we find a remarkably restricted trading range. Though we can seemingly always extend the quiet ‘a little longer’, it is inevitable that conditions normalize which would insinuate a transitional period of extreme volatility on the other side of the curve. The question is: when? Being mindful of that potential is important, but it is always important to trade the conditions in front of you.

Diving deeper into December, this is a month that is historically reserved against the development of strong risk trends – an elemental influence for AUDUSD in particular but also the Australian Dollar in general. In the week ahead, there are some notable, nearby technical boundaries for which we should keep track. This past week’s range high is very close to the confluence of the 200-day moving average and 18-month trendline resistance falling at 0.6875. Pushing that boundary would start to rouse discussion of a more motivated break. To the downside, we have November’s swing low at 0.6750 and the third quarter range of lower wicks around 0.6670-90. These are not very far away from spot into the open of this new week, but the 20-day ATR (one trading month) is extremely low at 35 pips a day.

Chart of AUDUSD with 200-Day Moving Average (Daily)

AUDUSD Chart with 200-Day Moving Average

Chart created with the IG Trading Platform

There is something to be said about this quiet. It raises the probability that the ranges that have developed out of these conditions are more likely to hold. Adapting to the prevailing market conditions is a necessary first step regardless of what environment we may be in. On the other hand, this degree of quiet is extreme. It will inevitably ‘normalize’ which means we will see a pick up in volatility. When transitioning from extreme quiet, there is usually a swing to extreme activity before we settle somewhere in the middle of these two poles. Looking at the bigger picture, the 5-week ATR for AUDUSD is the lowest since November 2002. That suggests a high probability breakout. Yet, when we are talking about a 5-week scale, it could take some time – perhaps in 2020 or when a critical development on the US-China trade war is made.

Chart of AUDUSD and 5-Week Rate of Change (Weekly)

AUDUSD Chart

Chart created with the TradingView Charting Platform

In the week ahead in particular, the economic docket offers up a relatively limited local run of data. That said, there is a very critical event that technical traders should ensure they consider before making any decisions based on technical levels, momentum measures, implied volatilities or any other similar source. The December 15 deadline for a US escalation on Chinese tariffs will loom large. When we overlay the Chinese Yuan to Dollar exchange rate (inverting the normal USDCNH), we find a very high correlation to AUDUSD. That is not happenstance. There are strong economic relations between the three. That said, a sharp move/momentum for USDCNH would likely translate into a critical development for AUDUSD. The technical event deadline is for Sunday, but breaking news could come at any time before then. More likely it would be unexpected news that is favorable while no word heading into the weekend would be an extreme risk threatening a downside move.

Chart of AUDUSD Overlaid with CNHUSD and 20-Day, 5-Day Correlations (Daily)

AUDUSD Overlaid with CNHUSD Chart

Chart created with the TradingView Charting Platform

In general, the developments for the Chinese Yuan will be mirrored for the Australian Dollar generally, but the direct correlation that includes the restrictions in recent activity for AUDUSD are not set in stone. There are a few Aussie-based crosses of particular note. GBPAUD has been driven recently by the polls heading into next week’s UK general election. The result has been a rebound to the upper bound of a large rising channel that stretches back to 2016 and now crosses with a multi-decade falling trendline resistance and longer-term Fibonacci retracement levels. Watch the 1.9200 level very closely.

Chart of GBPAUD (Weekly)

GBPAUD Weekly Chart

Chart created with the IG Trading Platform

On a more manageable time scale AUDCAD represents a more reasonable range to the typical conditions that we have been dealing with these past weeks and months. The 200-day moving average falls in line with a short-term 38.2% Fib and wedge top around 0.9125. The floor around 0.8970 would be the easier barrier to push given that it would keep us in a broader range.

Chart of AUDCAD with 100-Day and 200-Day Moving Average (Daily)

Australian Dollar Forecast Has a Systemic Break But How Far Out Is It?

Chart created with the IG Trading Platform

If you are looking for an Aussie cross with a stretched demeanor – both in technical terms and relative to other crosses – AUDNZD has been moving aggressively these past weeks. The slide has pushed the 20-day rate of change to its most bearish reading since May 2016. A reversal risk is high, but there isn’t firm support until another 100-125 pips below Friday’s close. Keep close tabs.

Chart of AUDCAD with 100-Day and 200-Day Moving Average

AUDNZD with 100-Day and 200-Day Moving Average

Chart created with the IG Trading Platform

AUD/USD MIXED
Data provided by
of clients are net long. of clients are net short.
Change in Longs Shorts OI
Daily 5% 6% 6%
Weekly 8% -2% 4%
See How Retail Traders are Positioning in AUDUSD
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In terms of speculative interest, the diminished ATR and weekly trading ranges seems to have discouraged both longer- and short-term trader interests. In the COT’s net speculative futures figure, we still have a net short position that is way off the implication of the continuous slide from these past 12-18 months. That disparity seems to be keeping such traders away. For the shorter-term retail trader, the IGCS shows a general appetite to exploit the range these past months, but there remains a stronger bias to the long side – suggesting there is anticipation for this quiet to end sooner rather than later with a critical break to the upside.

Chart of Net Speculative Positioning in AUDUSD Futures from CFTC Report (Weekly)

Speculative Positioning Futures COT

Chart of Retail Trader Positioning from IG Clients (Daily)

AUDUSD Client Positioning

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