Currencies in Focus: How Much Farther Will the Australian Dollar Fall?

The Canadian and Australian dollars are losing value as the price of gold and oil pull back. But the retreat of these “commodity currencies” might not last. In fact, there’s a chance we could start seeing a turnaround — no matter what happens with oil and gold.

Don’t get me wrong — the correlation between commodities and the Australian and Canadian dollars is undeniably strong. Their economies depend on exporting natural resources around the world, so their currencies tend to follow prices in lockstep.

Just take a look at how the Canadian dollar moves with oil prices.

Or how the Australian dollar’s value is tied to gold.

So long-term, the future of the Aussie and Loony is pretty bright. Oil demand is facing a crunch of supply vs. demand, a fact that even slower global growth won’t easily overcome. Gold, meanwhile, is always a favorite way to protect against inflation and political or fiscal uncertainty. I like to consider it an effective conductor of sentiment — and there’s a lot of negative sentiment coming down the pike.

The short-term, however, is a different story. Lower crude, silver and copper prices have hurt the Canadian dollar. And as Dow Jones pointed out the first week of this month, “The Australian dollar fell to its lowest level in nearly a week Wednesday as sliding silver and gold prices prompted a savaging of commodity-based currencies across the region.”

So a chart of the Australian dollar is showing a lot of negative sentiment right now. But we’re seeing “reaction-diffusion” — the impact of the falling commodity prices is spreading out, having less impact on the dollar.

This diffusion usually follows a well-known pattern, the world-famous Fibonacci sequence. So a reaction that moves 100 points will diffuse can be expected to give back 38 points, 50 points etc. You don’t need to understand exactly how it works… just that we can use these figures to make a reasonable guess on where prices will go next.

The AUDUSD has gone from a low of 9708 on March 16th to a high of 1.1010 on May 2. This is a low to high wave. The precious metal sell-off was causing the AUDUSD to fall back. In fact, it was nearing it’s first level of support at 1.0701.

As you might know, you can usually expect prices to bounce off a support level. And there’s every reason to expect the AUDUSD will do just that.

News of strong inflation in Australia will open the possibility of another interest rate hike — causing the currency to rally even in the face of lower gold prices.

We just need to wait for the Aussie to hit the support level of 1.0701 and the United States news to come out… then figure out the best binaries to use to ride the diffusion.  If you missed my tutorial on how to trade binary options, check out the Penny Sleuth website so you can start using this strategy.

Sincerely,
Abe Cofnas
Penny Sleuth

May 13, 2011

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