Aussie dollar

Once a year I like to write about the Aussie dollar although I do not get into the serious technical’s as this is the domain of our specialist currency expert, Matt Barnes. As an aside, each of the columnists selects their own area of specialty so hence you benefit with some really deep knowledge from our writers in specific areas . Imagine having the discipline as does Tim Walker to write exclusively and become a walking encyclopaedia on one stock - STO!

Anyway to the Aussie chart:

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I like raw line charts and what jumps out at me is the movement we have seen in the last few months. But using Elliott it has not necessarily been easy to pick moves as it has taken us down the garden path a few times.

Back in February it teased us with the prospect of a low in the range 78 – 82 cents:

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We then had to change our thinking as it went into an A B C pattern and then flipped up again in April:

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And now in June it has reversed thinking and we see a new bearish move:

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This can frustrate Elliott fans but I take the view such is the vagaries of the markets. I leave such a market until a decent trend develops or I trade both sides just for the sport – but holding only short term positions.

Short term positions I know suit many readers and the Aussie is likely to give many of you lots of fun and money in the coming weeks.

1. The U.S. dollar may be the world’s reserve currency, but that also means that countless tiny factors play into the buck’s value. Interest rates, major political moves, not to mention global events in all corners of the world can send money rushing for (or away from) the buck. For that reason, many traders have a hard time getting a “feel” for where the U.S. dollar is heading. So rather than playing a guessing game, they simply avoid the buck altogether. Instead, they trade crosses, like the EUR/JPY or GBP/CHF, etc.

2. Some crosses can be more volatile. That means they have the potential to jump higher or fall farther faster. Some traders like these types of quick movement because it gives you more opportunities for larger gains. This is why they have a love for pairs like GBP/JPY, which trade about 100 pips more a day than a “major” pair like EUR/USD.

3. Others like to technically trade crosses because they don’t have as much impact as dollar pairs often do. You see, U.S. news is the biggest mover of currency pairs. So if you want to trade off of technical signals from the charts and not get as many surprises from news announcements, then you can trade the crosses.

4. Spreads are narrowing for cross rates more and more all of the time. (This is important because remember forex dealers charge you the spread between each trade as their fee.) There was a day when the only reasonable spreads out there were in the majors. However, many cross rates have spreads between their buy/sell quotes that are half of what they were just a couple of years ago. As volumes increase in these crosses, the spreads narrow and draw even more traders into the pairs. So what once was a roadblock to some traders is no longer a problem.

5. Trading crosses offers more of a diverse trading portfolio than just trading EUR/USD, GBP/USD, USD/CHF, etc. If the dollar moves in a huge way, it’s going to affect all of those pairs even though they have other foreign currencies involved. However, if you have EUR/USD and GBP/JPY and you get a “dollar event” that moves EUR/USD, it doesn’t necessarily directly affect GBP/JPY. Therefore, you’ve diversified your risks.

Step 4: Get Educated So You Can Devise a Trading Strategy!

Up until this point, you have a live, funded account that you are NOT using yet.

You have a demo account that you’ve used to learn the mechanics of trading.

Now, BEFORE you place your first live trade – this is important — it’s time to start reading.

I see people “wing it” first, and it ends up costing them a lot. Then they back up and do it right.

It’s like trying to build something without reading the instructions first. Bad idea.

You also want to get a forex education, because it helps you to devise a strategy that could involve charting techniques called “technical analysis.”

Part of your strategy can include fundamental analysis. This might involve watching the economic calendars for clues as to how an economy is doing.

OK, so now you have a live, funded account. You know the mechanics of the trading station and you’ve just completed a quick, online course over the past few days. Here’s what to do next.

Step 5: Just Before You Place Your First Live Currency Trade…

Don’t start off trading multiple lots. Start off trading 1 micro lot in your micro account OR 1 mini lot in your mini account. This way, when you have losses at first (and we all do), they won’t be compounded by multiple lots.

Trade with the daily chart’s trend and never take counter-trend trades. This way you’ll have an edge over time.

Use wide stops because your trades will need some breathing room. If you set your stop-losses too close, they are bound to get hit and will cause you more unnecessary losses.

Focus at first on buying the country with the strongest fundamentals if you use a fundamental approach. Or focus on buying the most distinct upward trending chart if you are a technical “chart” trader. If the trend isn’t obvious, scroll through the charts until you find a trend that you could see from across the room.

I’ll visit you tomorrow with Part 3 of this mini-series on “Your Quick-Start Guide to Currencies.”

Now that we’ve covered what forex is, and how to get a running start in understanding the FX markets, tomorrow going to talk about something called “pips” … and how they translate into big gains.

Even better, we’ll take a look at an actual currency opportunity that, judging by the looks of its chart, is about to make a big move.

FOREX-Euro fails to hold gains after Greek aid package, forex market ,forex market  news

FOREX-Euro fails to hold gains after Greek aid package

Whatever the result of the upcoming consumer price index (CPI), homeowners should be prepared for an official interest rate rise on Melbourne Cup day.

The latest readings of CPI and underlying inflation at 1130 AEDT will determine the likely pace and size of interest rate increases by the Reserve Bank of Australia (RBA) over coming months, economists say.

The RBA holds its next monthly board meeting on November 3.

“Even if (CPI) comes in on the low side they are still going to do 25 basis points next week,” Nomura Australian chief economist Stephen Roberts told AAP.

The RBA has made it clear that it feels that it would be “imprudent” to keep the official cash rate at “emergency” low levels when the economy is in recovery.

It raised the cash rate to 3.25 per cent from 3.0 per cent early this month, and a further 25 basis point increase would add another $45 to monthly repayments on an average $300,000 mortgage.

Economists’ forecasts centre on an annual CPI rate of just 1.2 per cent as of the September quarter, remaining below the RBA’s two to three per cent inflation target.

However, annual underlying inflation is expected to remain stubbornly high at 3.45 per cent.

Rate swaps slip

Australian rate swaps fell and bond futures rose on Tuesday, as markets pared back expectations for a 50 basis point interest rate increase next month and as caution prevailed ahead of price index data.

Australian three-year futures rose 0.06 points to 94.61 while the 10-year contract was 0.025 points up at 94.275.

Interest rate swaps also fell on comments from influential columnist and central bank watcher Terry McCrann which were taken by the market to mean the Reserve Bank of Australia was unlikely to make an aggressive rate increase.

“The writer now sees a 50 basis points (bps) hike as less likely, really not a surprise given the lower PPI reading and the wobbles that are appearing in equity markets,” said Sean Keane, director of Triple T Consulting and former money market trader at Credit Suisse.

The 5-year interest rate swaps fell by two bps to 6.05 per cent.

Implied cash rates, based on money market and swap rates , are fully pricing in a 25 basis point hike and factoring in around a 25 per cent chance the central bank will raise rates by 50 basis points on November 3.

That compares with a 30 per cent chance of a half percentage point increase factored in last week.

“People are squaring up ahead of tomorrow’s consumer price index data and equity markets were not impressive today and that probably helped bonds and fixed income products,” said JPMorgan rate strategist Sally Auld.

Slow superannuation recovery

While households consider the implications of rising interest rates on their major asset, their second biggest investment - superannuation - is showing a slow recovery after the shock of the global financial crisis.

A report by the Organisation for Economic Co-operation and Development (OECD) shows that Australian super funds recovered 1.0 per cent in the first six months of 2009 after a drop of over 20 per cent in 2008.

This compares with an average 3.5 per cent recovery among pension funds across OECD countries and returns of 10 per cent in Norway and Turkey.

“The impact of the crisis on investment returns has been greatest among pension funds in the countries where equities represent over a third of total assets invested,” it said.

“In 2008, Australian pension funds were the most exposed to equities at 59 per cent of total assets.”

The Paris-based institution said funds in other countries benefited from having a large proportion of their assets invested in bonds, whose rates of return tend to be lower but more stable than those in equities.

Still, an analysis by Commonwealth Securities chief economist Craig James shows that the value of the Australian share market has now risen by over $500 billion to $1.4 trillion since March.

“It has been a great rebound, but it was a humongous drop from the highs of late 2007 and we still have some work to do to prepare the damage to superannuation and to wealth levels,” Mr James told AAP.

“But certainly from all the developed share markets and economies, you would have thought Australia was in the best position to claw its way back to those highs (of late 2007),” he said.

The S&P/ASX 200 share index closed at 4,753.5 on Tuesday compared with around 6,800 in late 2007.

Australia is the biggest the beneficiary of China’s industrialisation and has a strong banking and corporate sector.

Mr James defended super funds’ investment weighted towards shares.

“Over a long period of time domestic shares have outperformed other asset prices by a very significant magnitude,” he said.

“You could take short-term strategy and opt for safe haven bonds or cash, but really that’s not the strategy we advise for individual investors and it shouldn’t be what super funds take on either for the broader masses.”

Kenneth Davidson has been one of the most consistent voices for sensible economic analysis in the Australian media for decades now (another voice I’d give a similar accolade to is Brian Toohey), and he’s written a brilliant piece in The Age and The Sydney Morning Heraldon the speculative bubble that is the Australian dollar.

Davidson lays out the causes and probable effects superbly in the length of a newspaper feature. The causes are that:

– The bailout funds in the USA and UK in particular have cashed up financial institutions that don’t want to lend any more to mortgages (and have long ago forgotten how to lend to fund productive enterprises), so they’re looking for short term hot money gains;

– The RBA’s flagging that it intends raising rates from 2-3 per cent above rates in the USA and UK to possibly 4-5 per cent above is a “sure thing” return on a currency that was already appreciating because of commodity sales to China.

This gives the hedge funds a sure fire double whammy gain:

– Borrow in the US or UK at 1 per cent to buy $A and “invest” in floating rate bonds or shares (particularly in banks) and get a higher return (at least 2 per cent better than the borrowing costs, and assured to rise); and

– Drive up the $A in the process, so that when you sell out, you get both a higher return and an appreciated currency in which it is denominated.

The most remarkable thing about this bubble is that the RBA’s “we’re raising rates now and we’re going to keep on doing it for a few months” messages are part of the cause, and yet they seem unaware of both the phenomenon and the dangers it poses. Davidson points out that Brazil, which is experiencing a similar commodity-driven currency appreciation bubble, is aware of the dangers and is doing something about it:

“The rising value of the Brazilian real and the Australian dollar against the US dollar has had a disastrous impact on both countries’ non-commodity export and import competing industries. Brazil’s popular and largely economically successful left-wing government led by President Lula da Silva is meeting the problem head on. It has decided to impose a 2 per cent tax on all capital inflows to stop the real appreciating further.”

In the meantime, our RBA seems possibly even pleased that this short-term phenomenon is afflicting our manufacturing sector adversely.

Of course, like any speculative bubble, this has an end-game – and that’s when you think the rate rises have come to an end, sell out and watch the $A crash for those who are still holding it. Then the dollar (and Australian bank shares) will crash, and our economy will have acted as a dollar pump for the hedge funds.

Davidson also accurately notes that the RBA’s obsession with driving rates higher now is driven by the classic “fighting the last war” syndrome of believing that an outbreak of wage-driven commodity-price inflation is the main danger facing the Australian economy – just as it was in, oh, about 1973 (if you ignore private debt levels of course).

He concludes that:

“The world has moved on but the obsessive debate about wage inflation and union powers hasn’t. Since the beginning of the ’80s, the problem has been periodic bouts of asset price inflation. It is the biggest danger now.

“Instead of controlling the unions, there should be control of financial institutions. The Australian dollar bubble and the incipient housing bubble should be micro-managed. Capital inflow could be dampened by a compulsory deposit of 1 to 2 per cent to be redeemed after a year to stop speculative inflow. Home ownership has become a tax shelter. The steam could be taken out of the rise in house prices if negative gearing was limited to new housing. This would obviate the need for higher interest rates that affect everyone.”

It’s an excellent article – read it and pass it on.

FOREX-Yen gains on profit taking, dollar losses pause

forex markets news,forex markets ,forex trading

Yen gains broadly on profit taking after risk rally

Euro little changed, hovers hear year’s high vs dollar

* European July services PMI show economies nearing recovery

By Naomi Tajitsu

LONDON, Aug 5 - The yen gained broadly on Wednesday as traders locked in profits from a rally in currencies perceived to be higher risk, while the euro consolidated just under its highest level of 2009 hit against the dollar earlier in the week.

The dollar was little changed against a currency basket as the safe-haven U.S. currency found its footing after plumbing its weakest level of 2009 early this week due to escalating risk demand, but risks were seen tilted in favour of more selling.

Analysts said the market was taking a breather following the rally in currencies perceived to be higher-risk, while investors awaited policy announcements by the European Central Bank and the Bank of England on Thursday for more clues into their outlook for interest rates and quantitative easing.

“A lot of objectives in cross/yen have been reached,” said Neil Jones, head of European hedge fund sales at Mizuho Corporate Bank in London, noting that the Australian dollar had breached 80 yen, while sterling/yen has rallied above 160 yen.

“As a result we’re seeing some profit taking,” he said, adding that much of the flows seen on Wednesday were being driven by speculators.

At 0800 GMT, the euro <EUR=> was unchanged around $1.4400, recovering slightly from early losses after purchasing managers’ indices for services sectors in the euro zone generally showed improvement in July. [ID:nLAG003648] The pair hovered below $1.4445 hit on Monday, its strongest since mid-December.

IFR reported that around 250 million euros’ worth of options at $1.44 were due to expire later in the day, which analysts said may result in whippy trade.

Against the yen, the common currency <EURJPY=R> fell 0.3 percent to 136.73 yen, retreating from around 137.70 yen touched on Tuesday, its highest in nearly two months.

The yen rose broadly, pushing the dollar <JPY=> down 0.3 percent to 94.95 yen. Options worth around $450 million parked at 95.00 yen were also due to expire during New York trade, IFR reported, which market participants said may likewise cause some volatility around that level.

The higher-risk Australian and New Zealand currencies each fell roughly 0.7 percent against their Japanese counterpart.

The New Zealand dollar retreated from 64.35 yen <NZDJPY=R> hit earlier in the day, its highest level of the year.

Sterling <GBPJPY=R> fell 0.4 percent to 160.62 yen, after rallying to a two-month high above 162 yen on Tuesday.

Despite the pullback in riskier currencies, analysts said the trend for higher stocks and oil prices would keep risk appetite buoyant on the view the global economy is improving. This would keep the dollar vulnerable to more losses, they said.

“It’s still so much about risk appetite,” said Carl Hammer, currency strategist at SEB Bank in Stockholm. “In the coming week or two we may see another bout of dollar weakness.”

Technical analysts at the bank said euro/dollar was finding support in the lower $1.43 region, and that the next target for the pair was around $1.47, roughly around a record high hit in December

The Aussie Dollar (AUD/USD) just reached a 10-month high as the currency pair climbed above 0.8450. It has retraced a large part of the plunge occurred last year, when it fell by 39% in just 3 months, which is absolutely huge on the FX markets.

The extreme points of this large decline are points A and B on the weekly chart…

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Several technical indications argue for a completion of the current trend just ahead, around 0.85. The current bullish move has been valid since early November last year. The Aussie bounced back from 0.60 (point B) to 0.8450 which is a 40% rise. Actually, if we look in more details, the real start of the current trend has been posted at mid-March this year (point C).

This confirms the timing of the correlation that has been in place for 2 years now between the US Dollar, the commodities markets and the stock markets. When the risk appetite rises, investors sell the US Dollar (therefore buy other currencies like the Aussie) and buy commodities and stocks. Oppositely, they buy back the Greenback and sell the commodities and stocks when uncertainty and risk aversion appear.

Technically, the weekly indicators are really high now and don’t have so much more potential upside. This suggests a peak and eventually a consolidation or a correction. The MACD is well above its level when the price was at 0.9850 last year. The RSI is currently just below the overbought area.

On the daily chart, there is something more…

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A bearish divergence clearly appears through several oscillators. You may know that a bearish divergence is created when an oscillator does not confirm a new high posted by the price action. Typically it means you’re in the very last part if the rally. The trend completion is usually close. Here the Chande Momentum Oscillator illustrates this chartist configuration.

There is a resistance line at 0.85. This level corresponds to a previous low (point D posted in late august last year) that become a new high (point E posted in last September). This is clearly the target before a probable correction towards 0.81 in a first time.

In early deals on Monday, the Canadian dollar showed weakness against its U.S., European and Japanese counterparts as oil prices fell more than $1 to below $59 a barrel today, slipping toward a seven-week low on concerns about the state of the global economy as equities markets tumbled.

Crude oil for August delivery was down 50 cents at $59.39 at 4:37 am ET, after earlier falling $1.01 to a low of $58.88. London Brent fell 40 cents to $60.12.

Oil prices dropped 11 percent last week in their biggest weekly decline since late January as investors talked of the possibility of another dip in economic activity before the onset of recovery, which could delay a rebound in demand for fuel.

Oil shot up 40 percent last quarter and touched an eight-month high of above $73 a barrel as investors shrugged off weak fundamentals and banked on swift global economic recovery.

But a recent slew of bearish data around the globe, which suggested that some of the world’s largest economies were still struggling, prompted a sell-off in both oil and equities.

The Canadian dollar that closed Friday’s trading at 1.6237 against the euro fell to 1.6257 in early deals on Monday. The near term support level for the loonie is seen at 1.633.

During early trading on Monday, the Canadian dollar slipped against the yen. At 5:45 am ET, the loonie-yen pair touched 78.84, down from Friday’s close of 79.49. If the pair drops further, it may likely target the 78.6 level.

Industrial production in Japan grew a seasonally adjusted 5.7% month-on-month in May, revised down from a 5.9% rise reported on June 28, Ministry of Economy, Trade and Industry said today. On an annual basis, industrial output was down an unadjusted 29.5% in May, confirming the int ital estimates.

Meanwhile, a monthly survey from the Cabinet Office showed that Japanese consumer confidence rose to 38.1 in June from 36.3 in May. However, the index stood below the expected reading of 39.5.

The Canadian dollar declined to 1.1674 against the US currency during early deals on Monday. On the downside, 1.173 is seen as the next target level for the loonie. At Friday’s close, the greenback-loonie pair was quoted at 1.1640.

The U.S. monthly budget statement for June is expected in the New York session today.

In early deals on Monday, the Canadian dollar jumped to a new multi-week high of 0.8977 against the Aussie. The next upside target level for the Canadian currency is seen at 0.893. The aussie-loonie pair closed last week’s trading at 0.9066.

 Euro, British Pound Fall, But EUR/USD and GBP/USD Hold to Trading Ranges
- Canadian Dollar Mixed as Employment Fall Less Than Expected, Trade Deficit Widens
- Swiss Franc Still Range Bound - SNB Intervention Risk Looms

US Dollar, Japanese Yen Gain as Markets Remain Uneasy, US Consumer Confidence Falls

The US dollar and Japanese yen made headway once again on Friday as risk appetite remained uneasy. There were a variety of US economic releases, which offered mixed results. First, the US trade deficit unexpectedly narrowed to $25.962 billion during May thanks to a 0.6 percent drop in imports and a 1.6 percent rise in exports as the US dollar plunged. Meanwhile, import prices rose for the fourth straight month in June at a rate of 3.2 percent, which was the single biggest monthly increase since November 2007. However, deflation concerns weren’t completely pushed aside as the year-over-year rate of import price growth remained near the record low of -17.5 percent at -17.4 percent. Finally, the Reuters/University of Michigan consumer confidence index unexpectedly dove down to 64.6 in July from 70.8, with a breakdown of the report showing that sentiment soured on both current conditions and the economic outlook.

Looking ahead to next week, the Commerce Department is forecasted to report on Tuesday that US retail sales rose 0.4 percent in June, which would mark the second straight improvement, and excluding autos, retail sales are anticipated to increase by 0.5 percent. However, there is potential for a worse-than-expected result, as the International Council of Shopping Centers (ICSC) said that same-store sales tumbled 5.1 percent in June from a year earlier, which was the sharpest decline since March.

The main event risk for the US dollar on Wednesday will be the release of the minutes from the Federal Reserve’s last meeting on June 24. Following that meeting, the markets saw no surprises from the Federal Open Market Committee (FOMC), as they left the fed funds target range at 0.0 percent - 0.25 percent and made no changes to their quantitative easing (QE) program. The status of QE is high on the minds of traders, so the comments contained within the minutes will be scoured for indications that they will increase their purchases of Treasuries, and if they are found, the US dollar could fall sharply.

Euro, British Pound Fall, But EUR/USD and GBP/USD Hold to Trading Ranges
The euro and British pound took a hit on Friday, but from a longer-term perspective, pairs like EURUSD and GBPUSD remain range bound and we have yet to see any sort of directional break, which differs significantly from the JPY crosses that have broken lower. UK economic data highlighted the deflationary risks plaguing the nation as the UK producer output price index fell by 1.2 percent in June from a year earlier, the most since 2001, while producer input prices plunged 11 percent during the same period, the sharpest drop since 1997.

The data suggests that next Tuesday’s release of the UK consumer price index will also reflect lessening price pressures for the month of June. Indeed, the annual rate of CPI growth is forecasted to fall to a nearly two-year low of 1.8 percent from 2.2 percent, keeping inflation within the central bank’s acceptable range of 1 percent - 3 percent, but below their 2 percent target. If CPI falls more than projected, the British pound could pull back sharply as the markets will anticipate that the BOE will expand their quantitative easing efforts even further in August. On the other hand, if CPI holds strong, the currency could rally in response.

Canadian Dollar Mixed as Employment Fall Less Than Expected, Trade Deficit Widens
The Canadian dollar was the third strongest of the majors, trailing behind the US dollar and Japanese yen, as Canadian economic data was a bit better than expected. The net employment change for the month of June fell by 7,400, but this was much better than forecasts, which had called for a drop of 35,000. Likewise, the unemployment rate rose less than anticipated, but still hit a nine-year high of 8.6 percent. A breakdown of the report shows that any improvements were due to increasing employment via part-time jobs or self-employment, neither of which bode well for increased consumption down the line. Meanwhile, Canada’s merchandise trade balance fell to -$C1.421 billion in May as exports to the US fell to the lowest since October 1997.

Next Friday, headline CPI for June is projected to fall to an annual rate of -0.3 percent, while the BOC’s core measure is projected to hold fairly steady at 1.9 percent, down from 2.0 percent. Ultimately, the data will likely show that the bulk of price declines is due purely to falling commodity costs, and as long as the core measures don’t fall sharply, the Canadian dollar shouldn’t react too strongly. However, if broader price pressures start to fall more steeply, concerns about deflation may arise and weigh on the currency.

Swiss Franc Still Range Bound - SNB Intervention Risk Looms
EUR/CHF remains within an intraday falling channel formation, with support now at 1.5110 and resistance at 1.5200. This pair is important to watch as the Swiss National Bank (SNB) has cited the appreciation of the Swiss franc against the euro as a risk for deflation, and has physically intervened in the currency markets within the past two weeks. Also, last Thursday, SNB directorate member Thomas Jordan said that they “continue to consider interventions to prevent an excessive rise in the Swiss franc.” As a result, traders should beware that the further EUR/CHF falls, the greater the potential for intervention grows.

Sell Emus, Buy Kiwis

The “Aussie/Kiwi” should correct towards 1.20. Currently popular currency pair Australian Dollar against New-Zealand Dollar (AUD/NZD) is trading above 1.25.

There is a good opportunity now to sell to the AUD/NZD as the pair has posted several lower highs (points G, H and I on the chart). This suggests a further correction. In June, the price action found some intermediary support on the first Fibonacci retracement level (23.6% of the rise between October 2008 and March 2009). It is unlikely that this support level will hold durably.

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The key signal is that the AUD/NZD failed three times to break above the resistance level of 1.2950 (points A, B and C) during the last 12 months.

Indeed the resistance that has been reached once again in late April is the level around 1.2950. Actually the price action posted twice a high at 1.2938 (points B and C on the chart) while the high posted in July 2008 (point A) was 1.2967. The pair made a nice come back when it rose from 1.0625 (point D) to 1.2938 (point B). This 22% rise followed straight away the decline posted last year, between July and October (between points A and D).

A first correction has pulled the price back to the 38.2% Fibonacci level where a short-term double-bottom (points E and F) found some support and generated a rebound. Since the beginning of May, the price action has slightly corrected then bounced back several times, each time posted a lower high. This is typical of weakening momentum and trend reversal.

The technical indicators all turned bearish. We just plotted two of them that illustrate the current trend reversal. The 30-day Momentum indicator peaked in late April and has weakened significantly. It replicates the price action as it has been posting lower highs. The trend is clearly on the downside. On the very short-term, the Stochastic oscillator has also peaked and just curved downward. Those signals are confirmed by oscillators.

A correction towards the intermediate support of the 38.2% level is expected. This means that 1.2050 is likely to be the next target, and 1.18 (50% retracement ratio) is potentially another objective.

Still positively correlated with the stock indices, particularly the S&P/ASX 200, the AUD/JPY currency pair strongly rebounded between February and June this year. It posted a recent high on June 11 at 80.43 (point C on the chart). From the low of 55.51 posted in early February (point E), it’s a rise of 45% in 4 months and a half.

The trends are therefore really easy to identify on this chart. First, there was a sharp bearish trend that drove the price from 104.50 to 55 in the second half of 2008 (between points A and B), when the financial crisis was spreading globally. As you know, this plunge particularly impacted the commodities and stock markets, but also the FX carry trades. The AUD/JPY was one of the most popular carry trades: risk aversion and deleveraging hit strongly the value of the “Aussie” against the Yen.

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The bullish trend that followed (between points E and C) retraced half of the previous plunge. Indeed, the price action failed on the 50% Fibonacci retracement level, which corresponds to the level of 80. This level acts as a resistance line and is likely to hold firmly. The price peaked on this level three weeks ago, and immediately corrected. This was due to profit-taking and short-selling around this key Fibonacci ratio. As a result, the price fell back to the previous Fibonacci level (the 38.2% ratio, point D) where it found some support. Then the AUD/JPY has been bouncing back for one week now. A new attempt to break above the resistance line is probable.

Look at the Bollinger bands: the price action found bounced on the lower band. A move that originates at one band tends to go all the way to the other band. This observation is useful when projecting price targets. The upper band currently corresponds to the resistance line at 80. This is the objective for the current price action (the AUD/JPY is currently trading around 77.70).

But as mentioned above, the resistance is likely to hold. The indicators show that a bearish divergence has appeared. The MACD did not confirm the new high of the price action in June, and has already started curving downward. In this scenario, the AUD/JPY should quickly jump to 80 and then correcting strongly in the following weeks.

There was a lot of talk in the media last year about the Euro replacing the US Dollar as the Number One currency of choice in the world. The Euro climbed in value to around 1.6000 US Dollars, based on a lot of negative news for the United States economy.

Chart 1 below shows the Euro futures contract (EC-Spot in ProfitSource).

Chart 1

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Because each currency is valued against another currency, this chart represents the value of the Euro against the US Dollar. If the US Dollar is weakening, we would expect the Euro to rise in value, unless the Euro is also weakening.

You can see that from late 2005 to July 2007, the Euro had been trending strongly upwards. In the months following February 2008, the uptrend accelerated with a large amount of negative news coming out regarding the US economy and the US Dollar.

At the same time, nothing was said about the health of European economies, so the obvious move by traders was to buy Euros. Because of this scenario, the Euro was “overbought” in my opinion, rising higher and faster than it really should have.

When news started to come out mid way through the year showing that Europe had problems of its own, the market corrected itself, falling sharply. Even though we had a major crash, with the Euro dropping close to 4000 points over the past months, I would argue that it has simply returned to where it should have been in the first place.

I think in the year ahead we will see the Euro overtake the US Dollar as the currency investors turn to as a “safe haven”, if such a thing still exists in times like these.

The current market action is unfolding in a similar manner to the last major bear market low in November, 2005 on the Euro. In Chart 2 below, I have used the Split Screen mode in ProfitSource to analyse these two periods of the market side by side.

Chart 2

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The chart on the left shows the movement out of the November 17, 2005 low while the chart on the right shows the current market action, as we move away from the late October lows.

If these levels can hold moving into 2009, then I would expect the Euro to work its way back up to around 1.50 next year.

These periods of the market after sharp falls can be difficult to trade, as they are volatile and choppy. In the past month, we’ve seen the Euro trade in an 800 point channel, so care must be taken when looking to get set in this market.

I am confident that once the market has consolidated, we will see a strong move up lasting several years, as the US Dollar weakens and the Euro continues to gain in strength.

I would be surprised if the current lows in the market did not hold.

The first secret to trading currencies is pretty simple: Follow the fundamentals.

How do you do that? First of all, pay attention to what central bankers are saying about their economies. This is important. They may not always give you all the facts, but you can usually get at least an idea of what they will do next from their statements.

Central bankers will give you their thoughts on their respective economies. And if they don’t tell you outright, you can tell by their actions. For example, when central bankers raise rates, it means they’re fighting inflation. That’s usually a good sign for the country’s currency. However, if inflation is shrinking or if the central bank is in “rate cut” mode, then it’s bad for the currency.

If the economy is growing (according to its GDP numbers), then that’s another plus for a country and its currency. On the other hand, a falling GDP either means a country is slowing or the economy is shrinking rather than expanding. Either way, that’s a bad thing for the currency.

So to find the perfect currency pair to trade, you need to play “matchmaker.” Match up the best-looking country with high inflation and rising interest rates to the ugliest country with the worst fundamentals (lower inflation and slashed interest rates). Once you have your “best-of” and “worst-of” currencies, simply trade the good country vs. the bad country.

For example, let’s say you decided the U.S. dollar was the “ugliest” currency in the world because the U.S. is slowing and the Fed just cut rates. You also decided that the euro was the best-looking currency. In this instance, you would buy the EUR/USD pair.