The markets in general sold off to kick off the week on Monday, as we had a major “risk off” type of move in multiple assets, not just the Australian dollar. That being said, we have recovered late in the day, as the Australian dollar has broken above the 0.71 level. The fact that we did up forming a hammer is a bullish sign, but at the end of the day it is very likely that we will continue to see a lot of back and forth nonsense due to the fact that we have a serious lack of liquidity heading into the year end.
To the upside, the 0.71 level should offer resistance, extending all the way to the 50 day EMA. The 50 day EMA is at the 0.7233 level, so it makes a certain amount of sense that we would see selling pressure there as well. That being said, if the market was to break above there, then we could go looking towards the 0.73 level, which has a certain amount of psychology attached to it. Nonetheless, it certainly looks to me like we are more likely than not to go sideways than anything else, which is something that I am seeing across-the-board when it comes to the currency markets.
If we were to break down below the hammer for the trading session, then it would almost certainly open up a move down to the 0.70 level in a “risk off move.” 0.70 level will attract a lot of attention and I would be a bit surprised if we broke down through there. If we did, that would obviously be a very negative turn of events and could open up massive selling as the next major support level on longer-term charts is at the 0.68 handle. While I do not necessarily think that will happen, the reality is that it is a possibility.
On the other hand, if we were to break to the upside, I still think that there would be a lot of hesitancy above, as there has been such selling of the last couple of months. Unless something changes rather drastically, I just do not see a massive “risk on move” happening in the short term that could sustain the Australian dollar. This is especially true as it is highly levered to China, and a government that wants to lock the economy down at any given hint of a sniffle.
