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Aussie: A Pause Before Another Leg Higher – June 22, 2010

Like the NZDUSD pair in my other post today, the AUDUSD had also broken out from a double bottom formation. After doing so, it then consolidated within an ascending triangle before moving north again. And like the New Zealand dollar, the Aussie made a runaway gap over the dollar as well to start this week’s trading. Now, a bullish runaway gap is a gap on the price chart that occurs during strong bull movements. It usually occurs near the middle of the identified uptrend and can be seen as a signal of an increase in the trend’s intensity. With an overbought condition, the pair could, however, consolidate for awhile again or even retrace before continuing its trek upward. If the Aussie weakens, it could fall back to the bottom of the gap before aiming for its minimum upside target, which is computed by projecting the height of the double bottom from the point of breakout, near 0.9050.

As I’ve mentioned in my other post, this week’s gap among the higher yielding currencies like the AUD was due to the news that China would make its currency, the Yuan, more flexible. At present, the Yuan is pegged to the USD, making its value artificially low. Now, a weak currency is in a sense good as it makes a country’s exports relatively cheaper. It’s no wonder why China was able to post a 50% year-over-year jump in their exports last month. Moving to a more flexible currency policy would negatively impact China’s exports but the flip side is it would make the ones priced in other currencies (products from S. Korea, Germany, the UK, the US) more competitive in global trade. Once this happens, China’s economy would move to a more balanced one and the Western’s exports industry would improve.

Sentimentally, this would be positive for the likes of the Aussie. Fundamentally, however, it would such would be bearish on it. Why? Well, Australia is one of China’s biggest supplier of raw materials. If China’s exports dip, its demand for raw materials would decline as well. But that’s over the long term.

In the mean time, the Aussie could get some lift today if at least one of the high impact reports from Germany, Canada and the US prints an upbeat figure. Germany is slated to report is Ifo business climate today which is seen to taper a bit to 101.2 from 101.5. Canada’s inflation numbers are also due with the core account projected to rise again by 0.3% and the headline figure to post a modest gain of 0.1%. Back stateside, the US will then make public its latest existing home sales which is expected to have reached 6.17 million during the last month. Stay tune for these updates!

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