The Australian dollar has been one of my favorite ways to bet against the U.S. dollar. Earlier this month, the Aussie broke through parity and reached all-time highs versus the U.S. dollar. Since then, the currency has moved steadily lower, taking a brief pause to form the right shoulder in an ominous-looking head and shoulders (H&S) topping pattern. Over the past 3 days, the Aussie finally broke down from this H&S pattern.
I am always circumspect about H&S patterns because they seem so prone to fake-outs. Indeed, the chart below shows the current breakdown as well as the last breakdown that preceded a very strong rally in the Australian dollar versus the U.S. dollar.
Source: Dailyfx.com charts
So, this pattern warrants watching, but I also recognize that the relief rally in the U.S. dollar may soon come to an end as it approaches a critical test with its 200-day moving average (DMA). The 200DMA has served as a very reliable guidepost of resistance and support for the U.S. dollar index. So, I will be following THAT indicator even more closely (note that the Australian dollar is NOT part of the U.S. dollar index). Also, Australian GDP numbers are released later tonight. This GDP report takes on extra significance as markets worry that China’s monetary tightening combined with Australia’s hikes in interest rates are threatening to weaken the Australian economy.
*Chart created using TeleChart:
Be careful out there!
Full disclosure: long FXA, long AUD/USD