FYI | Jan 14 2009
By Andrew Nelson
A few weeks of rising markets and a push past US72c had many hoping the Aussie dollar would start showing some resilience and climb at least some of the way back to its July 2008 highs. Alas, this wasn’t to be the case and the technical FX team at CIBC World Markets holds out little near term term hope for the Aussie, or the euro against the greenback
Looking at the AUD/USD cross, the team notes the recent corrective rally was capped by resistance at US72c and the 100-day moving average. The rise to US72c also pushed the daily RSI to overbought levels, which were subsequently rejected. This supports their thesis that the strength in December was purely corrective.
This has set up the quick move lower to US67c that has occurred over the last few days. The problem is, this renewed push lower has also moved AUD/USD back below the 21-day moving average, which was a key support level throughout December. The break below this channel support points to a test of the trend low at 60c, says the team, and that level is fairly artificial as it only held up due to intervention from the Reserve Bank of Australia.
While the team has not attempted to predict the likelihood of another round of government intervention, it is confident that a break below US60c will trigger a round of panic selling. This, says CIBC, will get the ball rolling towards its ultimate target at US50c. This medium-term target represents a complete 100% correction of the bull trend that began in 2001 and ended in 2008.
In the other direction, a clean break above US72c would also be cause for concern.
What to do? Hold onto shorts, says the team, adding on strength towards US69.51c. Also use US72c as a risk point and target US60c for now.
The story isn’t much better for the euro, with the EUR/USD cross breaking below its key support at 1.3300 yesterday. A daily close below this level should further embolden sellers, taking EUR/USD towards 1.3000 by the end of the week, says the team. The chartists note that a pattern of lower tops is starting to emerge and this is the hallmark of a bear market.
On top of that, the daily RSI rejected overbought levels back in December and continues to move lower, leading the team to think that momentum is firmly in the bear camp. The fear is that once there is some significant trading below the 1.3000/85 support zone, there will be another leg lower towards 1.2500, and eventually down to the trend low at 1.2329.
The team admits it is being very bearish, but nonetheless stands firm in its belief that the turbulent end of 2008 and a subsequent spike to 1.4720 was simply a massive correction of the price weakness seen in the preceding months. This leads the team to predict a resumption of bearish price action, which is eventually expected to extend the trend low beyond 1.2329.
Ultimately, the technical FX team at CIBS thinks that EUR/USD will trade as low as 1.1500/1.1700 in the first half of 2009 and any daily close above 1.4000 would be cause for concern.
What do you do? Again, hold onto existing shorts, use minor strength towards 1.3550 to add to short positions, and target 1.2500 for the time being. Says CIBC.
