Bulls Bounce Back

From the desk of Steven Strazza @Sstrazza and Ian Culley @IanCulley

Last week, we pointed out that commodity-centric currencies were beginning to slide. 

Our petrocurrency index was making new 52-week lows, and the Australian dollar was on the verge of breaking down. By Friday’s close, the AUD/USD cross looked to have completed a topping pattern and was trading at its lowest level since the summer of 2020.

Seeing one of the world’s leading commodity currencies break down from a major distribution pattern would not bode well for commodities and other risk assets.

But the bulls aren't ready to roll over yet. Investors are back on offense this week, as buyers have already repaired all or most of the damage that was done to stocks and commodities last week.

They needed to come out swinging after the latest flurry of selling pressure… And that’s exactly what they did! 

We're also seeing very strong bounces in risk-on currencies like the Canadian dollar and the Australian dollar. What started out as a nasty resolution lower in the Aussie has morphed into a potential failed breakdown.

Here’s a chart of the AUD/USD cross with end-of-day data as of Monday’s close:

Midway through Tuesday’s trading session it was clear buyers were showing up in full force, pushing price back above our risk level around 0.7106. 

When we laid out the trade setup in the AUD/USD, we made clear that we couldn’t hold a short position if this cross was back above our risk level. So, now that price has reclaimed it, should we flip the book long?

As much as we like failed moves, this isn’t a chart that we want to trade at current levels. 

No matter what asset class we are analyzing -- bonds, stocks, commodities, or crypto -- there are often charts we want to buy, charts we want to sell, and charts that lack an actionable trade setup. (Louis gave some great examples among the altcoins in Tuesday morning's Crypto Note.)

The Aussie falls into the latter category. It's simply back in a range. Could it make a swift leg higher on the heels of this failed move and shakeout beneath potential support? Of course it could. But, at the end of the day, we'd simply be trading a range and counting on mean-reversion. We prefer to trade in the direction of the underlying trend, and in this case the primary trend is sideways at best.

Instead of approaching this commodity-centric currency as a tactical trade opportunity, we're focused on the information it holds. The big question, for now, is "will this failed move materialize into a fast move higher?" How AUD/USD reacts in the coming days and weeks is crucial.

It’s promising to see the bulls repair the recent damage so quickly. It would be highly constructive for commodities if the Aussie and other risk-on currencies continue to rally higher. That would probably happen in an environment where risk assets across the board are getting back in gear.

On the other hand, if we fail to see a swift move higher and just hang out at the lower bounds of this range, it probably means we’re in for more messy action. Just like any other breakout or breakdown, failed moves require confirmation in the form of a fast move in the opposite direction.

For now, it’s too early to tell if this one is the real deal or not. We’ll continue to keep you updated as the action unfolds.

Thanks for reading. As always, let us know what you think.

And be sure to download this week’s Currency Report!