The increase in AUD/USD rallies and reversals in the past couple of months is a testament to how the bulls have successfully changed the economic landscape in Australia. After moving lower, the AUD/USD was back above the recent range against the US Dollar at one month marker.
An open higher is always a sign of a broad-based rally that follows the support or resistance level. However, now it seems as if AUD/USD has reached its high point and also signaled an impending move lower.
There are four reasons why the AUD/USD may be moving lower. These factors include strengthening of the Australian Dollar, widening gap between CAD/USD/JPY, continuous losses in USD/AUD and weakened Yen/JPY. Below we discuss the potential downside risk for AUD/USD.
It seems that the Australian dollar is strengthening against the USD as there is more selling in AUD-USD (other than from traders who trade on anticipation of appreciation) and less buying from those who trade on expectation of weakness. This confirms that US consumers have come to the conclusion that they don’t need to spend more but rather save more and they are not likely to invest any more in their own country. This is not good news for the Australian dollar.
The gap between the CAD/USD/JPY has widened and continues to widen at a year point higher. This widening of the gap and growing divergence of the two leading currencies is a sign of investors nervousness about the future.
Two years ago this difference was not as wide, but two years later, the gap is growing by about 2.5% per year. So, the value of one US Dollar is worth more than one Canadian Dollar. Some analysts believe that this widening gap is already having a negative impact onAUD/USD.
The weakness of the raw materials market has also had an impact on the Australian economy. It appears that the recovery and expansion in the world’s largest commodity exporter will take longer than expected. As a result, the AUD/USD may continue to reverse, or move lower in anticipation of further weakening of the AUD/USD.
Stronger CAD/USD means lower AUD/USD. So, with stronger CAD/USD there is a lot of buying pressure on AUD/USD. If the AUD/USD moves down faster than traders can start to sell and you could see a break out of the closed range at the AUD/USD.
The weaker CAD/USD does not just affect the AUD/USD, but also the USD/JPY and the USD/CHF, which is seen as the UK’s currency. For some traders who keep large spreads for each pair of currencies, they cannot afford to hold EUR/USD/CHF.
In terms of a break out of the AUD/USD resistance, the AUD/JPY breakout is a bit further away than the AUD/USD breakout. Also, there is no major technical catalyst for a jump in the USD/JPY either. At the moment, the USD/JPY is still about four percent lower than the previous close, and it will probably rise even further before the end of the year.
A break out in any currency pairs indicates optimism, but it is important to remember that it is not going to last. A rally is likely to reverse at some point.
A breakout of the AUD/USD will probably follow, and this is probably when the AUD/JPY is likely to reverse once again, probably to a greater extent than in the past. There are some technical indicators in the USD/JPY that can indicate a possible reversal later this year, but the traders should wait until the market has settled before looking for some great entry points.