AUD/USD just keeps on keeping on. A month or two ago, if you had asked a market professional what the Australian dollar would have done when risk aversion made a strong jump, the most likely answer would have been to trade sharply lower.
However, this couldn’t have been further from the truth, as both a spiralling greenback and diversification away from the euro and US dollar has sent AUD/USD surging to new post-float highs. Rising US dollar-denominated commodity prices have also helped spur buying interest.
A technical perspective
From a technical point of view, AUD/USD is painting an interesting picture. Looking at it from a long-term perspective, the pair has just completed an important range retracement. From a low of 0.4776 in Q2 2001 to a high of 0.9850 in Q3 2008, the market rallied 0.5080 pips.
Interestingly, from the Q4 2008 GFC low of 0.60, the market has rallied to a high of 1.1080 (the exact same 0.5080 point range as before). This is commonly referred to as a 100 per cent range retracement. While we’re not saying this will mark the top, we did see the market sell off from the exact level overnight; a number of big global institutions have noted this development as being key.
In the short term
From a shorter-term perspective, the forex market is certainly overextended to the upside. It has risen during seven of the last eight sessions, and piled on 471 pips (or 4.4%). We would expect to see some sort of consolidation or pullback in the coming sessions, especially as the US dollar is approaching crucial support levels; it bounced off one of them on July 27.
However, at the end of the day, it’s all going to boil down to what happens with the US debt ceiling. Given the US dollar has fallen so much already, there is the very real possibility of a ‘sell the rumour, buy the fact’ reaction if a deal gets passed in the coming days. The bulk of analysts still think this is the likely outcome, especially since the consequences of a US default would be catastrophic.
Updated: 29/07/11
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