Strong headwinds for the Aussie

In recent years the Aussie dollar has been transformed from the embattled "Pacific peso" with its plunges towards the US50¢ mark whenever troubles at home or abroad spooked investors. Now it's more a measure of national substance befitting a country being transformed by the resource and service sectors with their close links to Asia's dragon economies.

But that's not all good. The currency's prolonged sojourns above parity with the greenback have in recent times been blamed for the economic malaise in areas as diverse as manufacturing, education, tourism and agriculture. For some time it sat above the parity perch, seemingly impervious to political jawboning, falling interest rates and softening commodity prices.

Then, a few days after the Reserve Bank of Australia's unexpected move to cut rates below 3 per cent, things turned around and the Aussie began to fall, dipping below $US1. Now the currency is well and truly in the grip of the "triple whammy of declining commodity prices, a rising US dollar and falling Australian interest rates", says Alan Clement, a member of the Australian Technical Analysts Association and the producer of this week's chart.

The Aussie topped out at $US1.09 back in July 2011 and then consolidated in a symmetrical triangle between the two red trend lines, mostly above parity.

Last week, however, it broke convincingly on the downside of this triangle pattern.

Clement sees US96¢ as a probable temporary support level where short sellers may close out their positions. But there is such momentum in the downside breakout that the US96¢ level is unlikely to hold up for long. If the currency falls convincingly through US96¢ then it will confirm that the entire price action above that level has been a large topping pattern from which the market was bound to fall.

Following a downside break from US96¢, the next support level will be at US85¢.

This is established by projecting the height of the triangle from the US96¢ support level to its 2011 peak (a distance of US13¢) downwards from the breakout point about US98¢.

There is a more bullish possibility here. If the US96¢ level does hold, we could expect to see medium-term consolidation between US96¢ and the previous peak of US$1.09. Headwinds for the Aussie in the medium term are likely to continue. Commodity prices look as if they are in a down cycle and the greenback seems set to strengthen further as the US economy picks up and the US Federal Reserve winds back its money-printing activities.

You can gain exposure to the Australian dollar on the long and short sides through futures, options, ETFs and CFDs, as well as by dealing in currencies direct.

This column is not investment advice. rodmyr@gmail.com

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