AUD/USD Daily Outlook March 1, 2012

By: Christopher Lewis

The AUD/USD pair has been very bullish as of late, and not for the usual reasons. In fact, the Aussie has been not only a play on growth and inflation, but also as a yield and safety play. I know it sounds counterintuitive, but we may have seen some kind of change in the fundamentals of what moves the Aussie over time.

The Asian countries are one of the few pockets of growth worldwide. The Australians supply most of Asia with its raw materials for expansion and manufacturing, and as such – as Asia goes, so does Australia and its currency. The copper market, gold market, Hong Kong real estate market, and many other manufacturing sectors in China and beyond can all give the Aussie a boost. It is because of this that the currency is one of the most favored by traders.

The yield is also one of the highest in the industrialized world, and as the market are offering such low yielding bonds, the Aussie is sometimes an attractive alternative to investors. Also, inflation can be a part of what drives the Aussie as well since it is so tied to the gold markets. As inflation rises, gold does as well. As that happens, more people are going into Australia and buying the raw material.

Flag Broken, or Not

The surge for the session has the markets well above the 1.08 resistance area that I have been talking about for some time now. The flag that had formed broke to the upside, and all looked very good. In fact, at the start of the day, I figured this pair was starting the next leg up to the 1.15 mark. However, later in the session we saw the pair fall as the “risk off” sentiment come back into the markets, and the fall in this pair signaled a reversal of strength, and the breakout looks a lot like a false breakout.

The pair is a long way from changing trends though, and because of that I would rather own it than sell it. However, at this level I am expecting a bit of a pullback to come into the market and then support to show up at the 1.06, 1.05, and most certainly the 1.04 level. The triangle that broke to the upside at 1.04 still suggests a move to 1.12, and I still believe in that thesis going forward. The market will be a “buy on the dips” one until 1.04 is broken on a daily close. I am looking to buy, and will be patient and wait for that supportive daily candle in the next couple of sessions before I buy again.