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IVM Capital AUD commentary 7/10/2010

Australian Dollar Approaching Important Level

By Brooklyn Trader

The Australian Dollar was the top performer this week among all G10 currencies, helped by similarly impressive rallies in the US S&P 500 and global commodity markets. Large gains were especially impressive given that the risk-sensitive currency finished as one of the worst-performing currencies just one week ago. The sharp reverse of momentum indicates the relative indecision across financial markets and warns of further volatility going forward. This week showed very little news from  Australia, therefore we feel the Aussie Dollar will continue to trade off the back of financial market risk sentiment—which has proven particularly unpredictable in the past several weeks of trading.

Our Trading Team feels it’s important to keep a close eye on the relative health of key equity indices; whether or not the past week’s rally is the start of a larger recovery or a simple short-term correction will be critical for the AUDUSD. The S&P 500 saw sharp declines as it peaked through mid-April and slid to fresh 9-month lows just two weeks ago. A subsequent correction leaves it considerably off of its trough, but sharp rallies have left it well-short of its secondary top through mid-June. All else remaining equal, bearish medium-term momentum favors Australian Dollar losses. Last week proves that relatively illiquid summer trading conditions can lead to sharp and unexpected price moves.

Recent Bullish momentum in the very short-term has taken place, however, we would not bet against further Australian Dollar recovery just yet. The pair currently trades near its highest levels in two months, and a test of a secondary top near the $0.8860 mark seems likely. Short-to-medium-term direction may very well depend on whether the Aussie Dollar is able to test and break this level.  In close we think there is a strong possibility of rally to this area followed by a retracement, therefore we are looking for possible short in the $0.8860 area.




Disclosure: Started Short at 1st overhead Resistance area 8777