Studies Suggest Pound / Australian Dollar Recovery Could Extend

The Pound to Australian dollar (GBP/AUD) has appreciated over the course of the week gone by and a unique chart pattern suggests further gains from here could be likely.

The GBP/AUD conversion has risen from Monday's low of 1.6736 to 1.7148 at the time of writing. 

The gains come as the Australian Dollar suffers a bout of weakness on news that the Australian Treasurer Morrison formally rejected a Chinese bid for Ausgrid on security grounds.

The deal would have prompted notable FX inflows into the country, and speculators would have traded accordingly.

With the deal scuppered an unwinding of those positions must take place.

With regards to the GBP/AUD specifically, our analysis suggests the nascent uptrend could extend based on the posting of a reliable ‘Three Outside Up’ Japanese candlestick pattern on the charts. 

Because Thursday ended as an up day (higher then it opened), then the three green up days in a row from the 1.67 lows will have also formed a rough ‘Three White Soldiers’ bullish Japanese candlestick reversal pattern.

This reinforcing the bullish potential of the three outside up already posted on the daily chart.

This now looks highly likely after investors were pleasantly surprised at higher-than-expected Retail Sales figures out on Thursday morning, which showed the Retail Sector incredibly resilient to Brexit-fallout in July.

Further supporting evidence that the pair may have bottomed and be reversing higher comes from the shape of the move down from the May highs, which looks very much like a bearish Elliot Wave has completed.

Elliot Waves are composed of five smaller component Elliot waves, which are themselves composed of five even smaller Elliot waves -  in a similar way to how identical but smaller Russian dolls fit into each other.

The Elliot Wave down has five distinct waves within, marked on the chart below, which suggests it is close to finishing or may even already have finished.

The next major resistance level from here is at 1.7460, followed by the 1.7797 highs.

Latest Pound / Australian Dollar Exchange Rates

	Live: 2.0112▼ -0.24% 12 Month Best: 2.1645
*Your Bank's Retail Rate	1.9428 - 1.9509
**Independent Specialist	1.9831 - 1.9911 Find out why this is a better rate

* Bank rates according to latest IMTI data.

** RationalFX dealing desk quotation.

 

The now complete wave indicates the down-trend is exhausted and the trend will now correct higher to a probable maximum target at 1.9020, which is the 61.8% retracement of the big wave down.

A break above the 1.7200 level would probably lead to a recovery to 1.73, followed by 1.7460.

Headwinds against sterling’s appreciation may come from the solid Aussie, however, which gained on robust employment data out on Wednesday.

It now seems less likely the Reserve Bank of Australia will cut interest rates any lower in 2016, having already made two 0.25% cuts so far in 2016.

As pointed out by Credit Suisse’s Bob Parker on Bloomberg News the ‘carry trade’ "trumps all" and may carry the Aussie higher as investors continue to be more attracted to Australian 10-year bond which have a positive yield of 1.84% than they do to Japanese bonds, for example, which have a roughly -0.1% negative yield and therefore offer no return.

Parker said the Japanese investment market continues to be important to Australia and the Aussie had benefited from much capital inflows from Japan since yields there turned negative.

Likewise, very low or negative yields in the US, UK, and Europe were also driving capital flows into Australian bonds, with the side effect of increasing the value of the Aussie dollar.

Nevertheless Parker was less optimistic about the rise in commodity prices such as copper and iron ore, which are key exports of Australia, arguing there was little upside left to them as a result of China’s gradual slow-down. 

The slowdown which would stall demand for these exports, since China, is by far, the largest consumer of Australian resources.

However, Pound Sterling Live this week published a report suggesting the outlook for coal and iron Ore - Australia's two largest exports - was greatly improved.

We note China's continued reliance on coal and robust demand for iron.

Further, we cited the latest set of BHP Billiton results as containing projections for a turnaround in commodity prices over coming months.