Pitchfork shows Aussie's rise may be in for a pause

THE dollar has been on a stellar trajectory since the global financial crisis hit in 2008. Back then it sank to about US63? as financial markets gyrated and credit markets froze. But as the dust settled and Australia, with its booming resources sector and well-capitalised banks, began to look attractive, the Aussie began to climb.

By InvestSMART · 23 Aug 2011

By InvestSMART ·
23 Aug 2011

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Alan Clement, an international futures trader and member of the Australian Technical Analysts Association, says its long-term trajectory has also been upwards. "The dollar has been in a long-term uptrend against the US dollar since its low below US50? back in 2001. It peaked at US95? in 2008 and then fell heavily to US63? during the GFC. This was followed by a sharp rise to the $US1.10 level we have seen recently."

However, Clement says the currency is showing signs of retracing some of its recent gains. Some short-term weakness is also to be expected given the deleveraging of risk we are seeing in stocks and commodities as investors sell assets to cut their borrowings in a world worried about debt. Because of Australia's large exposure to the resource sector, moves by foreign investors to reduce their exposure to commodities often means selling Australian dollar-denominated assets.

The chart shows what is known as an "Andrew's pitchfork" formation, with the handle of the pitchfork sitting on the 2001 low and the base for the three prongs built on the low and high points of the volatile year of 2008. "We see that the Aussie has recently found resistance at the upper boundary of the pitchfork (circled area). If this resistance holds, the first target to the downside would be a return to the pitchfork centreline, around US95? (marked T1)", Clement says.

If the price can find support and stabilise at the centreline, it could form a platform for another move to the upside. However, if it continues to weaken at that point, we could be headed for a retest of the lower pitchfork boundary, just above US80? (marked T2), Clement says.

In either case, we should expect the strong uptrend in the Aussie to continue after any short-term weakness. Indeed, Clements thinks many traders and investors will view any weakness in the currency as a long-term buying opportunity.

This is because the long-term fundamental outlook for the currency is good. "It is considered a proxy and safe alternative to Asian investment, and will prosper as the region's economies continue to grow," he says.

"Also, with Australian interest rates relatively high compared with other developed economies, it will continue to be in demand as part of the 'carry trade', where investors buy the Aussie while shorting currencies with much lower interest rates, such as the yen and US dollar. Finally, it is a 'commodity currency', so will continue to strengthen as commodity prices rise."

This column does not constitute investment advice. Investors should seek professional counsel.

rodmyr@ozemail.com.au

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Frequently Asked Questions about this Article…

What is the long-term trend for the Australian dollar (AUD) against the US dollar (USD)?

According to the article, the Australian dollar has been in a long-term uptrend against the US dollar since around 2001. It traded below about US$0.50 in 2001, peaked near US$0.95 around 2008, fell to about US$0.63 during the Global Financial Crisis, and more recently climbed to around US$1.10. Despite that long-term rise, the currency is showing signs of a short-term retracement.

What does an Andrew's pitchfork chart pattern signal for AUD/USD and how should investors read it?

The article describes an Andrew's pitchfork anchored on the 2001 low with the base built from 2008 highs and lows. The AUD recently hit resistance at the pitchfork's upper boundary. If that resistance holds the first downside target is the centreline (around US$0.95). If the centreline fails, the next test could be the lower boundary just above US$0.80. If the AUD finds support at the centreline it could set up another move higher.

Should everyday investors expect short-term weakness in the Australian dollar?

Yes — the article notes short-term weakness is likely because investors are deleveraging (selling stocks and commodities to reduce borrowings) and foreign investors trimming commodity exposure tend to sell Australian dollar–denominated assets. That can push the AUD lower in the near term even while the long-term trend remains positive.

Why might the Australian dollar remain attractive as a long-term investment?

The article highlights several reasons the AUD could remain attractive: Australia’s strong resources sector and well-capitalised banks, the AUD acting as a proxy or safe alternative for Asian investment, relatively higher Australian interest rates that support carry-trade demand, and its status as a commodity currency that benefits when commodity prices rise.

How do commodity prices and foreign investor flows affect the AUD?

Because Australia has large exposure to the resources sector, rising commodity prices tend to strengthen the AUD. Conversely, when foreign investors reduce their exposure to commodities they often sell Australian dollar–denominated assets, which can weaken the currency. The article points to this link as a driver of AUD moves.

What specific AUD/USD levels does the article suggest investors watch?

The article highlights a few technical reference points from the pitchfork analysis: recent resistance near the upper pitchfork boundary (the recent highs), a first downside target at the centreline around US$0.95 (T1), and a possible lower-bound retest just above US$0.80 (T2). It also notes the recent peak near US$1.10.

Is a pullback in the Australian dollar a buying opportunity for traders and investors?

The article suggests many traders and investors view any short-term weakness in the AUD as a long-term buying opportunity, given the currency’s favourable fundamentals and longer-term uptrend. That said, the view depends on whether support levels (like the pitchfork centreline) hold.

Does the article provide investment advice I should act on?

No. The article includes a disclaimer that it does not constitute investment advice and recommends investors seek professional counsel before making investment decisions.