Key Points:
- Long-term trend line capping upsides.
- Divergence becoming apparent.
- Currently in overbought territory.
Despite a rather spectacular recovery last week, the Aussie Dollar could be on the cusp or resuming its recent downtrend. If such a reversal does occur, losses could be fairly substantial and might extend back to the 0.76 handle and beyond. However, given just how bullish the pair has been over the past few months, we might need to take closer look at just why the technical bias seems to be shifting.
Firstly, even at a glance it seems to be fairly obvious that the AUD is battling against a long-term descending trend line and a historical zone of resistance. Even by itself, this trend line hints that upsides are likely to be severely capped and this could prove to be the end of the post-FOMC rally. Only adding to the resistance is the pair’s overbought status on the stochastic oscillator which, whilst not shown, is still highly influential.
Aside from these more obvious signals, there is another technical argument that is highly suggestive of a decline moving forward. Namely, both the MACD and RSI oscillator are in agreement that a regular divergence is becoming apparent on both the daily, H4, and H1 charts. Typically, such a divergence indicates that underlying bearishness is about to come to a head and the bulls are totally exhausted. When combined with the overbought readings and the trend line, further bullishness now seems like a fairly remote prospect.
As a result of this shift in bias, we now expect to see the pair begin to retrace to around the 0.7609 mark before the return of any bullish sentiment. At this price, both the 50.0% Fibonacci level and the 100 day moving average will be providing some stiff support which could prove difficult to break through. Due to this impasse, we should then see the bulls mount a solid recovery which could inspire another rally in the medium-term, testing the trend line at around the 0.77 handle.
Ultimately, we may have to wait for the fundamentals bias to mirror the technical bias before any serious downsides are realised. Specifically, we might need to rely on either stronger US data or some particularly hawkish remarks from Yellen. However, the predisposition of the pair to take a dive is worth keeping in mind as it could see greater losses occur than would normally be expected. In short, it’s no longer just volatility on the rise but also downside risk for the AUD.
