Will the Australian Dollar Continue to Drop?

On Wednesday, after the FOMC interest rate statement Wall Street equity traders dropped the 1% gains, that had taken 23 hours of futures trade on the S&P to build, in a 15 minute elevator ride lower.

Traders absorbed the BOE and ECB interest rate releases on Thursday, neither of which impacted the trading pattern seen earlier, as the U.K. and European central banks maintained rates at historically low levels.

Overall, the U.S. dollar index is trading around significant support levels shown, above the 75.00 area, where the dollar was easily bought from recently. If S&P futures hold below the 1069 resistance zone that dollar index support becomes rock solid it would seem. The inverted link between S&P/Usd intra-day trade is in place, and holding very well.

The global economic outlook still has yet to move from signs of growth, to monetized expansion, and that transition is very likely to lead to stair-step/elevator trading as each Asian, European, and U.S. trading session gets underway. We are seeing fair value being found on the dollar, and without a long break from the S&P above 1069 that holds, it is hard see how the dollar index can get under 75.00.

Over the past few days the market registered new highs on Gold, which interestingly did not push the Aud/Usd pair higher, as we may have expected. The recent reports from the Reserve Bank of Australia have highlighted the increased demand for the countries natural commodities, including iron ore, copper, and gold, which historically have increased the value of A$.

As such, S&P futures will have to break through the1069 area, for higher aussie prices it seems. Goodness knows where gold has to trade at in an effort to move the pair; fair value on Aud/Usd is obviously in place.

From an Elliott Wave perspective the aussie is consolidating around the daily trend-line support, which needs to be taken out for a down-trend continuation. A first target after the break would be the 50 day simple moving average at 0.8800.

TheLFB Charting: Aud/Usd Daily Elliott Wave view

Overall, the Aussie has dropped from the 0.9326 highs, with 400 pips already shaved off recent values that were set after the first of two 0.25% rate increases from the RBA, the second of which has not impacted the value of the pair at all.

Not even the second 25 basis point interest rate hike has been able to draw bids into the aussie, and that confirms the fact that forex values are linked to risk (equity trade) right now, and not yet interest rate differentials (global growth).

TheLFB Charting: Aud/Usd 4 Hour chart

As such, our subscribers were able to make some profit on this 400 pip move, after the chart below was sent out on 22^nd of October, just a session or two after the 0.9326 top was hit.

TheLFB Charting: Aud/Usd 4 Hour Elliott Wave view (posted on 22nd of October)