The Australian dollar initially fell on Friday but then turned around to form a bit of a hammer. At this point, if the market breaks above the top of the candlestick for the Friday session, it is very likely that we will get a bit of a bounce. That makes sense, considering that the market had broken down quite drastically. During the course of the week, we have dropped well over 200 pips, which might be a little overdone.
To the upside, I believe that the 0.73 level will be by far the extreme ceiling of the market, and it will be very difficult to break above there. The market had been going sideways for quite some time, but then finally broke down during the Tuesday session, showing a continuation of the bigger move. This was something that I had been waiting on, and now that we have made this massive move to the downside, you have to keep in mind that we will not go in one direction forever.
The alternate scenario is that we simply break down below the bottom of that hammer, which formed the Friday candlestick. If we do break down below there, the market then will go looking towards the 0.70 level underneath, which has multiple reasons to suggest that it could be supportive itself. To begin with, the market will have a certain amount of psychology attached to that area, so headline noise alone could cause some issues for sellers. Beyond that, we have also seen quite a bit of support in that area, so “market memory” would come into the picture.
If we did break down below the 0.70 level, then it is possible that we could break down quite significantly. If we do get that breakdown, it would be an extraordinarily negative turn of events, as the US dollar would suddenly start to strengthen against not only the Australian dollar, but all other commodity currencies from what I can see. We have already seen the Canadian dollar, New Zealand dollar, and Norwegian krone fall against the greenback, as we are starting to see a general run from the commodity markets in general. That being said, I think we will get a short-term bounce before any of that trouble in this market starts up.
