Australian Bank Poses Aud/Usd Valuation Question

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Includes: EWA, FXA
by: The LFB

At the start of the new week, Wall Street was higher by 1.2% on the Dow Jones, 1.5% on the S&P 500, and around 1% on the NASDAQ. The U.S. dollar was lower at that time, which was a correlation seen the later in Asian trade when the Nikkei closed higher by 0.18% and the HSI (Hong Kong and Shanghai Index) gained more than 1.5%.

Dollar Index 4 Hour View. The index looks very weak at the moment after prices broke through the 76.50 wave a) support in the past session. As such, we are looking for a test of the 76.4% Fibonacci support area, which must hold for a valid bullish wave count. We are looking for an expanded flat in the wave II) correction, where prices must not break through the 75.83 support zone.

Traders should know that wave two must never retrace for more than 100% of the wave one distance. If the 75.83 is taken out, then we will have to re-work the wave count, and will likely see a short continuation move.

Meanwhile the Aud/Usd pair is on the way to psychological 0.9000 resistance area it would seem, in a journey made a whole lot easier if the dollar index gives up the 75.83 support area, and gold holds above $1000.

Aud/Usd Elliott wave view. 4 Hour chart trend: Long. Main price points: 0.8567, and 0.8900-0.9000. Looking for: Wave V).

After a very strong Australian dollar against the U.S. dollar over the past few sessions, we have re-worked the past wave count. The previous 0.8857 highs were taken out, which put another impulse move higher in play.

There is an expanding triangle in a black wave IV) position, with the lows at 0.8567, where the recent up-trend started. Currently, we are looking for an impulse wave V) with the target between the 0.8900 and 0.9000 Fibonacci resistance area

These numbers have driven the U.S. dollar lower against most of the major pairs, and especially against the Australian dollar as the RBA supported Usd weakness by increasing the overnight interest rates by 25 basis points, to a 3.25% rate. As such, Australia is the first G20 country that has increased rates, since the credit crisis started.

Historically, when the RBA has started increasing rates, they have maintained a higher path overall for the next couple of years, and that is why most market participants will expect to see a plus 0.8650 read on aussie going forward.

If the ECB at their rate meeting on Thursday make the same decision as the RBA, then traders can expect a huge decline in the U.S. currency over the coming weeks, at least until the next FOMC rate decision, which will be on 4th of November 2009. In that time the oil and gold markets would probably have followed aussie and euro on their respective treks higher.

The point to not is that the Australian economy is backed by a wealth of natural commodity resources, and that has played a part in fighting future inflation with a rate hike.

From a technical standpoint the bottom on the dollar index chart has not yet been reached, and traders may see another push down to the 74.00 support area, and that could happen quite quickly if the 75.83 low is taken out.

Disclosure: No positions.