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An opportunity in a downtrending Aussie Dollar and More

Posted on: 19 February 2018 , by: Darren Sinden , category: Market Review

Trending  - AUDJPY short on a break of 85.00  

Over recent weeks, the Japanese Yen has appreciated against both the US Dollar and the Aussie. Following the recent bout of equity index volatility, this Yen strength may be a sign of "risk off" flows moving into a safe haven currency. It could also represent a growing realisation among investors that the Japanese economy is finally coming out of its decade-long slumber, or it may be a function of a combination of these two factors.

AUDJPY short on a break of 85.00

Over recent weeks, the Japanese Yen has appreciated against both the US Dollar and the Aussie. Following the recent bout of equity index volatility, this Yen strength may be a sign of "risk off" flows moving into a safe haven currency. It could also represent a growing realisation among investors that the Japanese economy is finally coming out of its decade-long slumber, or it may be a function of a combination of these two factors.  

Whatever the case, this Yen strength has coincided with a period of weakness in the Aussie Dollar Index which measures the performance of the Australian Dollar against a basket of currencies from its trading counterparties.

Since the end of January, the Aussie Dollar index has fallen by five big figures. As we can see from the chart above, the index and the AUDJPY exchange rate moved hand in hand, breaking through 85 in the last leg of a fortnight-long downtrend. As a result, there’s  potential for a move in AUDJPY, to and through 84, and back to 81.58 (the low seen in mid-April 2017). And from here, to 80.76, the low from November 2015.
 
The AUDJPY rate has also been sensitive to commodity prices over the long term. Whilst commodities rallied in 2016, the end of January saw prices under pressure. If AUDJPY tests 84, it could give way to a new bear trend with 83.70 on the cards along with other levels flagged. Australian economic fundamentals remain mixed and the Reserve Bank of Australia seem happy to leave Australian interest rates on hold, leaving JPY as the safe haven.

Contrarian - Short Brent Crude Oil

Oil prices have been rallying since late January 2016

Oil prices have been rallying since late January 2016, when they began to bounce from multi-year lows. After a pause in Q2 2017, the rally gained fresh impetus in the summer, with Brent crude pushing on relentlessly to $70 per barrel. By late January 2018, the price more than doubled in over two years. But as noted, commodity prices in general have been moving lower in 2018, though oil had been an exception to this trend until we entered February. After that, it also started to correct to the downside. 

In fact, the speed of the recent downside moves almost negated this idea, which had originally been to sell a break of $65 pb. 

The move following the initial break of $65 may already be over. But there might well be scope for a second leg lower that could take us back to US$57.00, the high from April 14th, 2017. 
For that to come to fruition, we would need to see the current short-term bounce come to an end, most likely through a rejection of $65.00 (something that is happening on H4 charts as I type) accompanied by a subsequent close below this level. 

We should then look for a break of $63.84, $62.97 and $61.76, all of which have been recent lows. Of course,  we will need to take out the round number at $60.00 in order to head back to $57.00. 

We may need a fundamental catalyst to drive this rapidly expanding US crude production coupled with concerns about the strength of US growth may fit the bill. Though we have to be aware that this negativity could well be counterbalanced by a weakening US Dollar, which can act as a positive influence on Oil prices. 

Golden Cross Over - Long EUR GBP 

The British pound has been appreciating over the last few sessions

The British pound has been appreciating over the last few sessions, following inflation data which reinforced the idea that the Bank of England will raise UK interest rates at it's May meeting. Those gains have been expressed most clearly in the Cable (GBPUSD) rate, but we have also seen an appreciation against the Euro, which itself has been gaining traction against a weaker US Dollar. 

The chart above is a D1 plot of the EURGBP rate with  20, 50 and 200-day Exponential Moving Averages. You can see that we are now approaching a critical level and may see a Golden Cross-Over, a rare technical signal. A Golden Cross Over occurs when the 20 day EMA crosses above the 50 day EMA which signals a change in trend, bullish in this case, through rising price momentum. 

If the golden cross is generated, then we should look for prints at 89.08 and once above here we can aim for 89.82  and 90.1. Note the later level was the high point in the shooting star posted on the 15/11/2017. As such, it may still represent meaningful resistance. 

The Moving average is simply a rolling plot of the average price of an instrument calculated over a given number of periods. For example, in a 20-day moving average, the average price of the instrument is calculated using rolling periodicity of 20 units. The Exponential element simply means that the averaging process is weighted to give greater emphasis to near-term moves over historical ones. Moving Averages can be plotted as a line on a chart and plotted over a series of different time scales. When they are deployed in this fashion, they can provide a useful visual clue about momentum within price action. 

Pepperstone’s trading platform MT4 comes complete with a fully customisable charting package. Users can plot indicators such as Moving Averages over periods of their choice and draw them on charts, over a variety of time frames. That means you can quickly compare price momentum over different time scales by, for example, plotting hourly and 5 minutes charts in the same instrument. Moving Averages can be combined with other indicators such as RSI 14 or Bollinger Bands, which can all provide insight into the likely direction of future price action. If you don't already use indicators such as these as part of your trading process and would like to give them a try, then why not download our MT4 User Guide. You can find more information about using indicators in this helpful Trading Guide.

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