The Australian dollar has recovered quite nicely over the last couple of days as we continue to see a massive bounce from the 0.70 level. That in and of itself is probably not a huge surprise, due to the fact that the 0.70 level is obviously a large, round, psychologically significant figure and an area that a lot of people would be paying close attention to. Because of this, I think the market is very likely to continue bouncing a bit, but there are several areas of resistance above that come into the picture rather quickly.
The most obvious one would be the 0.720 level, as it is another large round number. After that, we then have the possibility of the 50 day EMA coming into the picture near the 0.7268 level and dropping. And then we have the previous uptrend line. At this point, this has been a very impressive rally, but when you look at it through the prism of the longer-term chart, you can see this has been by a recovery more than anything else. In fact, we are not even at the 38.2% Fibonacci retracement level. It is because of this that I think it is only a matter of time before you get an opportunity to start shorting again, something that I would pay close attention to. Ultimately, this is a market that will obviously be very noisy eventually, due to the fact that the Australian dollar is so highly levered to China. Keep in mind that the Evergrande situation has not worked itself out, so we may see an eventual Exodus from Chinese assets, although that is not my base case scenario.
When you look at the market, you can see that we are a bit overdone to the upside, just as we had started to get overdone to the downside several weeks ago. That could cause a little bit of a short squeeze for the time being, but the first sign of exhaustion we get above I will be more than willing to sell, because the risks outweigh the rewards. It is not until we break above the previous trendline that I would consider buying the Aussie dollar, because quite frankly Australia still has a very dovish central bank while the Federal Reserve in the United States is still going forward with tapering.
