AUD/USD -20 Dec

Last week AUD/USD topped just below 1.06. In the last sessions a pullback to below 1.05 has taken place. The move looks like a consolidation at a high level after a quite impressive runup since September.

1.06 was hit in August and in September, so the pair might be in the process of making a triple top. We should wait for a confirmation of that in the next sessions. A potential triple top at 1.06 would be very bearish. The chart of daily prices of the last months looks like the letter “W”. Bears could take control anytime, particularly if market sentiment changes to negative.

It is a fact that AUD goes higher when investor optimism improves. The trader’s term for that is carry trade. Very briefly, that means traders like to borrow money in a lower interest rate currency (like the USD) and with this money buy the AUD and lend it and receive a high interest rate for it, so that they earn the interest rate differential. Ideal for them is when AUD moves higher.

The carry trade is sometimes a brilliant idea, but it runs the risk of AUD going down to the USD, which means they will have to pay back more AUD on their USD credit. This is a very rough description of the carry trade for those unaware.

Keep in mind that AUD/USD sometimes works as a leader of other risky investments and a proxy of investor optimism. In other words it is often the case that AUD starts moving in one direction before other risky investments follow suit. This is a reason why this currency pair is worth following.

After trading below 1.06, the last couple of days have been negative for the AUD, but not a game changer. In the next sessions we have to watch the pair’s consolidation around those levels. Firstly, a retest of 1.06 or even slightly higher levels are very likely, but if sellers finally show up and defend this crucial level successfully, a bigger move down could begin.

As I mentioned, risk sentiment will be the all decisive factor. I don’t like to guess, but the runup of AUD since the beginning of October has been quite impressive. For sure 1.06/1.0650 is a level where serious supply is going to take place, so all those still being long should take notice and honor their stop loss orders.

Petros