Originally published by AxiTrader
Justified? Is it?
That's the question I've been asked already on the strong bid in the Aussie dollar. And it's the question I've seen folks on the business channels asking themselves today.
That's because the AUD/USD is unexpectedly strong up here at 0.7680 - its highest level since March 22. So traders and investors question what the Aussie dollar is doing at such an elevated level.
Chartists won't be surprised by the strength. The Aussie has been climbing a wall of worry for weeks. It found support at an important Fibonacci level around 0.7330, it then rallied to 0.7515/20, which held. Once that level broke the AUD/USD ran to a Fibonacci projection in the 0.7635/40 region.
That area too held initially and AUD/USD failed multiple times. But each pullback was met with buying before ultimately the Aussie broke yesterday. And after a protracted period where 0.7435/40 was too hard to break it's no surprise then that it rallied half a percent overnight.
The big question for me is not whether the Aussie dollar's rally is justified. Rather, the question I'm asking is whether after such a strong technical move from below 74 cents if the next Fibonacci target at 0.7735/40 is really in the frame.
I'll get to that later. But first, it's worth talking about fundamental justifications.
The Aussie is higher because the US dollar is weaker. That's the easiest explanation. And if you look at the hourly charts since the 22nd of June it's also a pretty good explanation for the rally in the euro, crude oil, copper, and the Thomsen Reuters CRB index more broadly.
It's these commodity price moves that provide a positive feedback loop into Aussie dollar sentiment. As the US dollar falls the Aussie lifts and then gets a kicker from the US dollar fall also lifting commodity prices.
Throw in the mild broadening of Australian bond spreads to their US counterparts in this current rising interest rate environment and the Aussie finds a little more support.
So in the short term, the Aussie's move is justified by both technicals and fundamental drivers.
But that naturally begs the question of what's next.
Looking at the 4-hour charts I see a real chance of a pullback to former resistance at 0.7635/40. That's now support which includes my fast moving average on the 4 hour charts. The 38.2% retracement level on this time frame is at 0.7628 so it could extend to there.
The release of Chinese PMI data today is going to be an important incremental driver of any move on the day.
Medium term however. the Aussie is getting to the limits of what might be called "fundamental fair value" as it approaches what looks to be significant overhead technical resistance.
0.7710/20 marks the region where the trend line from the April 2016 high above 78 cents comes in. Above that, we have the Fibonacci extension of the recent move which targets 0.7735 and of course, the 0.7750 region is the high for the year.
My sense is the Aussie is nearing a top.
Here's the daily chart:
Have a great day's trading.