AUD/USD Daily Outlook Feb. 23, 2012

By: Christopher Lewis

Few pairs have been as strong as the AUD/USD pair over the last several months, except possibly the NZD/USD pair – which makes much of the same moves. The Aussie is often used as a play on commodities as the Australians have many of the raw materials that the world uses to expand the economy in the form of construction or manufacturing.

The Aussie also has the benefit of being a higher yielding currency, and this will also attract some investors that are simply looking for some kind of yield as the bond markets of the safer countries offer so little these days. The carry trade isn’t exactly dead, but it is being done in a slightly different form now.

The Australian economy has been fairly strong, and although there was hints at a possible cut in interest rates recently, the Reserve Bank decided against it, and this put a bit of a bid in the Aussie as well.

Consolidation and 1.04

We have recently seen the pair stall at the 1.08 level and pullback to the 1.0600 area. The levels are both considerable, but the real support will be found at the 1.04 level as it was the site of the breakout that sent the market to these levels in the first place. We had a daily triangle formed just under that level, and the height of the triangle measured for a move all the way up to 1.12 or so.

Also, with the Federal Reserve promising a low interest rate environment until the end of the 2014 calendar year, there is a real chance that commodities will see some kind of super spike as the fiat currencies will be shunned in favor of wealth storing commodities such as gold, iron, oil, and many other futures contracts. Because of this, there will be a natural bid for this currency in general.

The 1.04 level should be a “line in the sand” at this point for the bulls. If that level gives way, we could see the pair fall significantly. However, I believe the 1.05 and 1.06 levels should offer potential support levels. I am looking for those areas to offer supportive candles to buy such as hammers and bullish engulfing ones.