Aussie Continues to Consolidate

By: Christopher Lewis

In the schizophrenic currency markets of 2011, the Australian dollar has been particularly interesting as it has made several violent moves over the last 12 months, normally predicated upon a random headline coming out of Europe.

The global risk environment seems to have the attention span of a 3 year-old child these days, and it is obvious that the high-frequency traders have invaded the currency markets. The game changes when this kind of trading becomes the norm, and long-term buy and hold strategies simply cannot and will not work in these conditions. The old days of buying a currency for a few years might possibly be over with.

The Aussie is a great example of risk allocation. When people feel that the global economy is bound to recover or expand, they will buy the Australian dollar in general. This is because Australia provides the world with a lot of minerals and various other construction materials. Copper, iron, and gold are all major exports. More importantly, the Aussies sell a lot to the Chinese, which the entire global financial network seems to pin its hopes on for growth these days.

Looking at the charts, you can see that the parity level is some kind of magnet for price. The Aussie has been up, down, and sideways – but this level seems to be in the picture no matter what. The consolidation area goes back several months, and forms a massive triangle at this point. This suggests that someday we will see a massive move in one direction or another, but until we see some kind of resolution out of Europe, we simply will not know.

The back and forth nature of the markets has made the savvy trader a short-term trader these days. Too bad really, as the largest profits can be made from simply be correct over longer periods of time. However, this AUD/USD chart shows just how erratic things continue to be. 2012 should simply be a continuation of this type of trading unfortunately, but with a little upfront knowledge, you can be prepared by taking profits a little quicker and tempering the expectations for the size of any potential moves.