It is that time of the year when we take stock of what happened during the year but most importantly what could be the best trades of 2023. We believe that the Aussie dollar could shine next year. Below we present a series of charts and analytics to support our bullish view on the AUDUSD going into next year.
When in doubt ALWAYS zoom out! Forget about the business TV outlets and their overpaid anchors, spinning some narrative about the markets. Trust the charts and yourself. Not confident reading charts? Then keep learning and training. Become your own professional voice. We can help you achieve that.
Time and time again, we re-iterate to our viewers and subscribers to always watch the Monthly and Quarterly charts. Invaluable price action and trend information resides within the higher timeframes. At the start of every month, set aside an hour and review the higher timeframe charts. You will be surprised how much sharper and focused you will become, armed with the long term technical picture.
The monthly and weekly candlestick charts of the aussie below highlights the 10 year downtrend that ended in early 2020 at the height of the Covid 19 pandemic that also, coincided with the commodity and risk asset low as well. The aussie and commodities tracked risk assets higher but in early 2021 the aussie de-coupled from commodities and equities. Why? The after effects of COVID 19 lockdowns, were severe supply chain disruptions that saw inflation expectations starting a parabolic trend. Simply put, there was not enough local manufacturing capacity to satisfy post Covid demand! Blame globalisation for that.
Alongside the rise in inflation expectations, came a resurgent dollar, as market participants were expecting that the FED will at some point, have a complete U-turn on interest rate policy and turn off the quantitative easing tap. Of course, the FED proved ineffective and acted too late in combating inflation. Echoes of ‘inflation is transitory’ from the FED chambers must be still ringing in Powell’s ears. The FED was/is reactive rather than proactive in trying to tame inflation. Thus the dollar strength hit every major FX pair and wreaked havoc amongst all asset classes. Heightened volatility adversely impacted the Aussie, and it started correcting its Covid low rally and we believe the October ’22 0.6181 low is a significant pivot for the AUDUSD.
As we enter 2023 we believe that the following factors will act as tailwinds for the AUDUSD:
- Gradual China reopening.
- Dollar weakness as the FED slows interest rate hikes and ultimately pauses.
- Re-coupling with commodities as commodities start their next up leg, as the USD declines.
Chart 1. AUDUSD: Monthly chart
November saw the AUDUSD complete a monthly morning star candlestick reversal pattern at the 61.8% Fib Retracement (log -scale) and the 161.8% extension (log-scale). We view the October 2022 low at 0.6180 as a significant pivot and we remain bullish biased going forwards against this pivot low.
Chart 2. AUDUSD: Weekly Chart
Price action since the Feb ’21 decline looks to be corrective, with overlapping swings and largely being contained in a down channel. The October ’22 channel break was short lived and price quickly returned back inside the channel. In the short term, momentum is ‘overbought’ and we believe that the aussie will correct lower for the next few weeks. Bear in mind (pun intended), at the time of writing, the USD Index has hit major price support within the 105/104 support zone. We expect this too hold and the USD to rally.
Chart 3. AUDUSD: Daily Price and Volume Chart (yes volume!)
The daily price action and volume chart supports our call for a short term pullback in the aussie. Price action in recent weeks is forming a rising wedge pattern (bearish), right at short term T-Line and moving average resistance. Both daily momentum and volume indicators look overbought. We will be looking for opportune moments to get long the AUDUSD if the correction ensues.
Chart 4: AUDUSD: COT Data
Large speculators are reducing their bearish bets on the AUDUSD after extreme short positioning.
Chart 5: AUDUSD: Seasonality
After the turn of the year, the AUDUSD will be coming into a favourable 3 month period starting in February, looking at the 22yr seasonal average chart.
Chart 6: Interest Rate differentials
We believe that the spread between the Australian 2y yield and the US 2y yield has bottomed or is in the midst of bottoming. Currently we have another long term non-confirmation between the AUDUSD spot rate and the spread. Keep an eye on this one as well.