By Greg Holden
The shift in global risk sentiment has driven many currency pairs into above-average volatility. Japan’s nuclear crisis is undermining the global recovery by forcing a policy reevaluation by central banks regarding risk exposure.
The currencies experiencing the sharpest change in value are the Swiss franc (CHF), Japanese yen (JPY), US dollar (NYSEARCA:USD) and Australian dollar (NYSEARCA:AUD).
The Aussie, in particular, has witnessed a wide swing in value over the past few weeks. As we can see in the charts below, the AUD/JPY dropped almost 1,000 pips, a change of 11%, while the AUD/USD fell over 400 pips before retracing some of these losses.
What is striking about both pairs is the apparent deceleration of the AUD’s uptrend versus both safe-haven currencies.
Against the yen, the Australian dollar has just breached its trend-line but has yet to close below that significant support level. What this means is that the pair has suffered a downturn, but a trend reversal remains beyond the scope of this analysis for the time being.
However, the trend-lines have become flatter since last June, suggesting that the pair’s bullish strength is beginning to wane under shifts in risk appetite.
AUD/JPY – Weekly Chart
Pairing the AUD with the US dollar also shows a similar shift in sentiment. Most visibly, though, is the AUD/USD’s more pronounced deceleration and possible head-and-shoulders formation on the weekly chart.
The AUD/USD pair shows a similar attempt at a head-and-shoulders reversal between August 2009 and June 2010, but the “head” fell short of its shoulder levels, undercutting the formation’s technical strength.
We can see with the recent candlestick formation, between October 2010 and March 2011, that the “head” was indeed able to break above the shoulder line and we are beginning to see the technical downturn. If the pair can close below its support level near 0.9800 this should signal for a mass sell-off by technical traders, pushing the pair towards the 0.9400 level and perhaps beyond.
AUD/USD – Weekly Chart
A similar sentiment may be expressed in regards to the AUD/JPY. If the yen continues to strengthen unabated, with no currency intervention by the Bank of Japan (BOJ), then we could see a break below the 38.2% Fib line, with a more than 50% chance of a retracement to the 23.6% level just above 67.20.
It doesn’t seem likely that either Australia’s or Japan’s central bank would allow such a change in value for their respective currencies, but technical forces may push against their respective plans.
Going short on the AUD appears like a solid choice for the foreseeable future as a result.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.