For the better part of 2009 Australian Dollar was the darling among currencies. The Aussie enjoyed steady appreciation and not just against US Dollar, but across the board. No surprise, really. Judging by economic numbers, downturn in Australia was less severe than in other industrialized countries. Exports remained strong, especially to China with it’s ever growing economy. Unemployment, while it spiked in early 2009, remained relatively benign when compared to other major economies. By mid year this number had stabilized under 6% and even started to drop towards the end of 2009.

Reserve Bank of Australia took positive view on the state of economy and began rising interest rates. RBA became first central bank to do it since global financial crisis erupted. To date they did it four times, pushing short term rates to 4%, the highest among major currencies. This, in turn, fueled carry trade, with money following interest rates differential. Just like earlier in the decade, when major rallies in AUD and NZD were fuelled by fat premiums one could collect for being long these currencies. All said, fundamental picture for the Aussie has been good and it is reflected in Australian consumer confidence.

Reading of this indicator reached an extreme of 124, comparable to previous highs in 2007, 2004 and 1994. Many fundamental analysts view this as a contrarian indicator. Excessive confidence might be a harbinger of worsening economic conditions ahead. In case of Australia, any slow down in Chinese growth would be a cause for reversal of fortune, which is very realistic at this point. Chinese authorities have been taking active steps to prevent bubbles, likely leading to cooling in that economy. Renewed rift of Yuan exchange rate is also not positive for China. With this in mind, bases for less than positive outlook Down Under exist, which can easily be followed by weakening currency. In fact, when talking about Australian Dollar, this may already be happening.

AUD has been making new highs against European currencies, but not in relation to US Dollar, the most widely watched Aussie pair. Since reaching 0.9400 in early November, price have been drifting lower. As of right now, using weekly chart, this can be seen as either a congestion area or a reversal. Bearish view can be supported by a nice reversal pattern created by the last three candlesticks. Market could proceed lower, to a Fibonacci retracement of 38.2, at about 0.8100, or even to the next level, 50.0, at 0.7700. This also corresponds with latest support of any significance. Since trading weekly Forex charts is rather difficult for most participants, due to the patience required, one can look for opportunities on daily graph of AUD-USD.

By definition of a downtrend, lower lows followed by lower highs, daily chart of AUD-USD has already turned negative. At this stage it is not very convincing, because of large corrective moves, but technically it is a downtrend. Based on that, sell signals should be taken more seriously than buys. Right now price sits on 100 SMA, which has flattened and possibly turning down, yet another bearish indication. Selling Aussie-Dollar at around 0.9040 can be very attractive proposition – stop should be placed at just above the high of 0.9250, target at the latest low just under 0.8600. And that might be just the first objective. As a secondary confirmation, AUD started to fall against other currencies as well.

This massive reversal formation on intermediate term chart of AUD-CHF looks completed. Price finally broke through support at 0.9620. While it can easily retreat back to the wide congestion zone, at this point probabilities favor continuation of down move over time. And when it comes to AUD-CAD, often a good proxy for general strength of either of these currencies, it had been falling since November last year. Overall, technical picture suggests difficult road for the Aussie.

Big time fundamental news, especially surprises, can override technicals, at least in the short term. Most important right now will be interest rate decision by Reserve Bank of Australia. Next policy meeting is scheduled for April the 6th. Another rate increase could push AUD higher. However, no action, leaving rates steady, would be negative. Also, any return of global “risk perception” to the markets, should depress Australian Dollar even more. On balance, currently short trades in AUD have good risk/reward ratio, something to look into.

Mike K.