Sive Morten
Special Consultant to the FPA
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- 18,754
As it should be gold research, but gold shows nothing interesting yet. That's why we replace it today with AUD analysis that stands in close relation to gold market. Gold market, in turn, we will discuss in nearest daily videos on Tue.
Fundamentals
Australia flirts with first recession in 25 years
Australia's GDP contracted by 0.5% in the third quarter, reflecting a large decline in investment, and leaving personal consumption as the only meaningful source of growth.
With high household debt loads and soft wage growth, consumer spending cannot be relied upon to drive a material pick-up in economic activity.
However, industrial metals prices have rallied in recent weeks on the back of a more positive global growth outlook.
That should support exports and investment, and help Australia to avoid its first recession in 25 years, but at the cost of delaying a much-needed economic rebalancing.
COT Report
Recent CFTC data shows significant drop of open interest with decreasing of net long position at the same time. This tells about closing of long positions. At the same time, no new shorts were opened. That's why currently we can't make a conclusion on some new bear trend or something of that sort. Current dynamic gives a hint on some dissapointment among inverstors may be, with bullish potential of AUD.
Still, to be honest, take a look at CFTC dynamic since Sep 2015. Market was changing net speculative position from net short to net-long and vice versa, open interest was fluctuating, but - price... Price was changing in narrow range ~ 400 pips. This tells on weak overall impact of speculative positions on AUD dynamic. So, we would say that although net position is dropping, open interest is dropping, but it is not the fact yet that it will make strong impact on AUD rate...
The same dynamic we see on gold market as well - closing of longs stands on the market for a whole month already:
Technicals
Monthly
Situation on monthly chart of AUD has changed slightly, especially after US elections. Our previous analysis was based on two major factors. Technical one was suggested upside bounce due reaching of strong, major 5/8 monthly Fib level and appearing there DRPO "Buy" pattern. While fundametal factor was a healthy interest rates in Australia and so-so Fed policy on rate hiking, especially when they have said on just 2 rate changing instead of 4.
As elections have happened, now more agressive Fed policy is expected, especially in 2017, more protectionism, more stimulus from Trump to domestic economy. This combination will become a headwind to AUD appreciation, especially on a background of some issues that we've specified in beginning of this research. As a result we see CFTC data that indicates more closing of long positions, we see changing rethoric from RBA that brings more dovish hints. And we see reflection of these events in current technical picture of AUD.
On monthly chart, as AUD has reached YPP early, in the beginning of the year - for the whole year it was not able to break it up. So 50% FIb resistance level has not been completed. Besides, right now AUD drops below YPP. This, in turn, could lead AUD lower to YPS1 level. This action could take a shape of butterfly "buy" that has 2 extensions - 0.65 and 0.61 levels. Both stand around previous lows of 2008.
Still you could argue that recent action doesn't break yet chances on upside butterfly as well and AUD still could reach YPR1, at least until lows around 0.7150 holds. This is true, formally. But We see price action on weekly chart that mostly unspecific for bullish market. It leads us to conclusion that further drop has more chances than reversal up...
Weekly
What particular we do not like in recent action?
Take a look at weekly picture. Here we have clear reverse H&S pattern, and initially this was a pearl in our analysis that provided confidence in possible upside reversal, so everything was as ti should to be. AUD was going to become a safe haven and replace US for investors in coming uncertainy of US elections etc. But situation has changed as well as price behavior.
Take a look what AUD shows right around neck line. It has reached it, then has turned to long-term consolidation but was not able to break it up. In fact AUD was not able to pass through nearest 3/8 FIb resistance level and dropped. This is not the way how upside reversals and breakouts happen usually, right?
Now AUD stands below MPP, trend has turned bearish here. Now, on weekly chart, major level is 0.7150 lows, bottom of right shoulder. As we've said above - it is important, since it keeps valid (at least theoretically) chances on appearing upside butterfly. But not only due this reason. This level is important also, because this is a key to massive drop. If AUD fails around right shoulder - it will drop below head's bottom and this will open road to monthly butterfly and its targets.
Daily
You should be familiar with daily picture since we've traded it not long ago. B&B "Sell" trade, remember? Last week. As B&B has been completed, AUD has tried to re-establish upward action but was not able to move above 0.75 area. As you can see this is lower border of long-term consolidation that market will protect.
If AUD will return back inside of it - this probably will postpone further downward action, but while market protects this area and keeps price outside - this looks bearish and stands in a row with normal bearish action. Now, as you can see, this is also MPP.
4-hour
Here picture mostly stands the same as on our B&B "Sell" trade, since AUD was not able to break existend resistance up. Let's focus on bearish signs that we have here, because they are not at surface and demand some analysis.
Let's start with our initial AB-CD. This was one of the patterns that we've used for short entry on B&B "Sell". As B&B has been completed, market has dropped - it has re-established upside action. It looks normal, right?
But if AUD in for a dime, it should in for a dollar, right? It means that if market is bullish and re-started upside action, it should proceed to next extension that is 1.618. But it couldn't do this. It stops at the same resistance around 0.75. Besides, last upside leg is much slower than first one...
Second - now take a look at wide AB-CD (that I've marked by letters). Market has reached 0.618 extension and can't move up further. On Friday bearish grabber has been formed that suggests drop below recent lows.
That's being said, overal picture here shows market's weakness and not typical for normal bullish market that intends to go higher. At least currently...
You even could recognize some kind of skewed H&S pattern above... From that standpoint, it seems important to watch for breakout of this trend line, especially as we've got bearish grabber:
Conclusion:
That's being said, we will not cancel totally our long term view on AUD perspectives. if Australian Central Bank will not change it's policy drastically and will not be involved strongly in currency war - Australia could get significant advantages from healthy interest rates, relation to gold mining industry, self-sufficient economy and one of financial centers of Asia region with English-speaking population. This really still could happen, but should be postpone for 1-2 years probably.
In short-term perspecitves situtation has changed, mostly not due AUD itself but due USD. This leads us to adjustment of short-term expectations and watch for possible further weakness in AUD in coming 3-6 months.
The technical portion of Sive's analysis owes a great deal to Joe DiNapoli's methods, and uses a number of Joe's proprietary indicators. Please note that Sive's analysis is his own view of the market and is not endorsed by Joe DiNapoli or any related companies.
Fundamentals
Australia flirts with first recession in 25 years
Australia's GDP contracted by 0.5% in the third quarter, reflecting a large decline in investment, and leaving personal consumption as the only meaningful source of growth.
With high household debt loads and soft wage growth, consumer spending cannot be relied upon to drive a material pick-up in economic activity.
However, industrial metals prices have rallied in recent weeks on the back of a more positive global growth outlook.
That should support exports and investment, and help Australia to avoid its first recession in 25 years, but at the cost of delaying a much-needed economic rebalancing.
COT Report
Recent CFTC data shows significant drop of open interest with decreasing of net long position at the same time. This tells about closing of long positions. At the same time, no new shorts were opened. That's why currently we can't make a conclusion on some new bear trend or something of that sort. Current dynamic gives a hint on some dissapointment among inverstors may be, with bullish potential of AUD.
Still, to be honest, take a look at CFTC dynamic since Sep 2015. Market was changing net speculative position from net short to net-long and vice versa, open interest was fluctuating, but - price... Price was changing in narrow range ~ 400 pips. This tells on weak overall impact of speculative positions on AUD dynamic. So, we would say that although net position is dropping, open interest is dropping, but it is not the fact yet that it will make strong impact on AUD rate...
The same dynamic we see on gold market as well - closing of longs stands on the market for a whole month already:
Technicals
Monthly
Situation on monthly chart of AUD has changed slightly, especially after US elections. Our previous analysis was based on two major factors. Technical one was suggested upside bounce due reaching of strong, major 5/8 monthly Fib level and appearing there DRPO "Buy" pattern. While fundametal factor was a healthy interest rates in Australia and so-so Fed policy on rate hiking, especially when they have said on just 2 rate changing instead of 4.
As elections have happened, now more agressive Fed policy is expected, especially in 2017, more protectionism, more stimulus from Trump to domestic economy. This combination will become a headwind to AUD appreciation, especially on a background of some issues that we've specified in beginning of this research. As a result we see CFTC data that indicates more closing of long positions, we see changing rethoric from RBA that brings more dovish hints. And we see reflection of these events in current technical picture of AUD.
On monthly chart, as AUD has reached YPP early, in the beginning of the year - for the whole year it was not able to break it up. So 50% FIb resistance level has not been completed. Besides, right now AUD drops below YPP. This, in turn, could lead AUD lower to YPS1 level. This action could take a shape of butterfly "buy" that has 2 extensions - 0.65 and 0.61 levels. Both stand around previous lows of 2008.
Still you could argue that recent action doesn't break yet chances on upside butterfly as well and AUD still could reach YPR1, at least until lows around 0.7150 holds. This is true, formally. But We see price action on weekly chart that mostly unspecific for bullish market. It leads us to conclusion that further drop has more chances than reversal up...
Weekly
What particular we do not like in recent action?
Take a look at weekly picture. Here we have clear reverse H&S pattern, and initially this was a pearl in our analysis that provided confidence in possible upside reversal, so everything was as ti should to be. AUD was going to become a safe haven and replace US for investors in coming uncertainy of US elections etc. But situation has changed as well as price behavior.
Take a look what AUD shows right around neck line. It has reached it, then has turned to long-term consolidation but was not able to break it up. In fact AUD was not able to pass through nearest 3/8 FIb resistance level and dropped. This is not the way how upside reversals and breakouts happen usually, right?
Now AUD stands below MPP, trend has turned bearish here. Now, on weekly chart, major level is 0.7150 lows, bottom of right shoulder. As we've said above - it is important, since it keeps valid (at least theoretically) chances on appearing upside butterfly. But not only due this reason. This level is important also, because this is a key to massive drop. If AUD fails around right shoulder - it will drop below head's bottom and this will open road to monthly butterfly and its targets.
Daily
You should be familiar with daily picture since we've traded it not long ago. B&B "Sell" trade, remember? Last week. As B&B has been completed, AUD has tried to re-establish upward action but was not able to move above 0.75 area. As you can see this is lower border of long-term consolidation that market will protect.
If AUD will return back inside of it - this probably will postpone further downward action, but while market protects this area and keeps price outside - this looks bearish and stands in a row with normal bearish action. Now, as you can see, this is also MPP.
4-hour
Here picture mostly stands the same as on our B&B "Sell" trade, since AUD was not able to break existend resistance up. Let's focus on bearish signs that we have here, because they are not at surface and demand some analysis.
Let's start with our initial AB-CD. This was one of the patterns that we've used for short entry on B&B "Sell". As B&B has been completed, market has dropped - it has re-established upside action. It looks normal, right?
But if AUD in for a dime, it should in for a dollar, right? It means that if market is bullish and re-started upside action, it should proceed to next extension that is 1.618. But it couldn't do this. It stops at the same resistance around 0.75. Besides, last upside leg is much slower than first one...
Second - now take a look at wide AB-CD (that I've marked by letters). Market has reached 0.618 extension and can't move up further. On Friday bearish grabber has been formed that suggests drop below recent lows.
That's being said, overal picture here shows market's weakness and not typical for normal bullish market that intends to go higher. At least currently...
You even could recognize some kind of skewed H&S pattern above... From that standpoint, it seems important to watch for breakout of this trend line, especially as we've got bearish grabber:
Conclusion:
That's being said, we will not cancel totally our long term view on AUD perspectives. if Australian Central Bank will not change it's policy drastically and will not be involved strongly in currency war - Australia could get significant advantages from healthy interest rates, relation to gold mining industry, self-sufficient economy and one of financial centers of Asia region with English-speaking population. This really still could happen, but should be postpone for 1-2 years probably.
In short-term perspecitves situtation has changed, mostly not due AUD itself but due USD. This leads us to adjustment of short-term expectations and watch for possible further weakness in AUD in coming 3-6 months.
The technical portion of Sive's analysis owes a great deal to Joe DiNapoli's methods, and uses a number of Joe's proprietary indicators. Please note that Sive's analysis is his own view of the market and is not endorsed by Joe DiNapoli or any related companies.
Thank you!