With the new year underway AUD/USD is looking to break higher and put to bed what was a horrid December.
The Aussie Dollar has already weakened significantly versus the US Dollar since the exchange rate rolled over from its November 0.77 highs.
Given AUD/USD is now in the 0.71-2s, this represents a substantial circa 10% crash in value.
The exchange rate has now reached a long-time support level creating an important watershed moment for the pair.
If it manages to break below historic support at the May 2016 0.7145 lows, it will be a strong bearish sign; if, however, there is a rebound from here, it will be short-term bullish sign.
Hantec Markets' technical analyst Richard Perry see’s risks tilted to more downside.
“The bear candle on the first trading day of 2017 has put the pressure back on the crucial support of the $0.7145 May 2016 low despite a rebound today,” says Perry in a note seen by Pound Sterling Live.
At the time of writing the AUD/USD is looking bouyant at 0.7241 which begs the question as to whether this spike should be taken as an invitation to sell, indeed the intraday charts show successive attempts at rally keep being “sold into,” says the Hantec analyst.
But, this could also serve as a cautious reminder that the exchange rate is in fact forming a longer-term base.
Perry observes that momentum indicators are pointing south and a successful break below 0.7145 would open 0.6970 or even 0.6825.
A break above the 0.7280 level would be required to alleviate downside pressure.
Pound Sterling Live's own view is less bearish.
Although the short-term trend is definitely down, and therefore likely to extend, we do not concur that momentum is especially bearish, not in recent periods anyway.
The RSI shows a rebound from oversold lows which have provided a ‘buy’ signal.
The Stochastic in the very bottom pane is rounding a bottom in its sine wave cycle and looks about ready to rise, indicating more upside.
The MACD – on our chart anyway, is crossing its signal line, indicating traders should close their short positions.
We also interpret the move down as an ABCD pattern, otherwise known as a measured move.
The completion of such a pattern indicates a distinct possibility of a reversal of the short-term trend, and more upside.
This combined with the tough support at 0.7145 from the May 16 lows raised the possibility that the pair may strengthen, not weaken in the short-term.
Nordea Research Points to High Probability of Dollar Weakening Soon
The consensus from analysts at the moment is that the Dollar is going to continue rising.
However, research conducted by Martin Enlund, head of FX at Nordea Bank, presents compelling empirical evidence that there is a ‘White House’ effect on the dollar which could provide more backing for a contrarian short position on the currency at the start of the year.
The research shows there is a statistically significant probability that the Dollar will weaken at the start of the year of the inauguration of the president.
Depending on the pair in question, the Dollar has weakened between 8 and 11 times out of a total of 12 that a president has been sworn in since 1973.
On all occasions, the weakness started at the start of the year of the inauguration of a President until the middle of March of the same year.
Given Donald Trump’s inauguration is on January 20, this seems to indicate a high probability of the Dollar weakening over the next two and half months.
The chart below shows the results for the EUR/USD pair which shows the highest incidents of Dollar weakness in inauguration years than all pairs.
If the Dollar is weakening here, then we can expect the same to be true for the AUD/USD.