Technical Charts Flash Warning Signs for Australian Dollar

Technical analysts and traders in the foreign exchange market are paying attention to potential problems with the charts of the Australian dollar. With some patterns forming in the Australian dollar's price movement, it raises concerns that the Australian dollar may be going into headwinds, so if you are exposed to Australian dollar-denominated assets, you should examine the technical picture very closely to see what it is saying about the future of the Australian dollar.

Technical analysis plays a somewhat debatable role in currency markets, since many fundamentalists argue that exchange rates are affected primarily by interest rate spreads, real gross domestic product (GDP) growth rates, trade balances and commodity prices. On the other hand, technical analysts argue that price movements in all these fundamental factors should supply an indication of where the financial markets are headed, because the price movement of a security represents the collective buying and selling of all investors, not just investors who have had prior access to information about changes in the underlying fundamentals.

The Australian dollar has technical factors and fundamental factors that need to be examined. Historically, the Aussie has been linked heavily to commodities; specifically, iron ore and the types of resources China utilizes in large amounts. Additionally, as it relates to the overall global appetite for risk as a whole, the Australian dollar has generally declined in value when investors are feeling defensive about their investment scenario and conversely will appreciate or gain value when the global economy is giving them more confidence regarding the economy performing well over the next couple of years.

The Aussie dollar charts appear to be sending multiple warning signals at this time, which may be due to more than one reason. The uncertainty surrounding the pathway for the economic growth in China, which is extremely important for the overall commodity business that Australia exports to China, is an element of concern. Additionally, the relative difference in interest rate expectations between Australia relative to the U.S. (and other "major economies") is another important factor that most currency traders will consider when deciding whether to continue holding, or reducing their holdings of the Australian dollar.

Examples of chart patterns technical traders typically monitor for warning indications include; declining momentum indicators, broken or broken trends below key levels of support, and the formation of structures that typify trend reversals. When experienced traders see a number of different signals that are all moving in the same direction, they will take that as a very serious sign, even though the fundamental background has not yet fully confirmed or produced an overall negative opinion from a fundamental perspective.
In the upcoming weeks, we will see how for the Australian dollar will progress. It will either gain some support and stabilize or will continue to show signs of weakness in line with its bearish technical pattern. The fundamental drivers of each currency as well as the overall risk appetite in the market will dictate whether the Australian dollar declines further from here or whether it stabilizes.