The AUD/USD pair has been in a nice uptrend since the beginning of June. However, we saw a breakdown on Friday below the uptrend line that has been propelling this pair much higher. We've seen a lot of trouble at the 1.05 level, and it looks to be very resistive at this point in time. Although we manage to break down below the trend line, by the end of the Friday session we bounced enough to form a hammer and talk in just at the trend line itself.
One of the biggest problems that Australia is currently facing is the fact that the Chinese economy seems to be slowing down. The fact that the Chinese may be purchasing fewer raw materials for manufacturing in the future should drive down the value of the Australian dollar. In fact, most of the commodity currencies have suffered over the last couple of trading sessions, and it does look like it could very easily continue.
1.05 And a hammer
The hammer from Friday is a significant candle in the future of this currency pair. If we manage to break down below the bottom of the hammer, it looks to me like we will revisit the 1.03 level and quick order. If we manage to get below that level, we will more than likely find the parity level once again. This area should show quite a bit of support, and as such we would be very cautious being short of this pair if we get that area.
However, if the global economic situation continues to slow down the Australian dollar will certainly be one of the softest currencies out there. All you have to do is look at the last few years of trading in the Australian dollar to recognize the fact it tends to shoot straight up or straight down based upon risk sentiment.
Because of this, I am looking for a break of the bottom of this hammer in order to go short. If the market gets above the 1.05 level on a daily close, I am willing to go long at that point in time. However, until we get either below the hammer or above that level, it looks to be like a choppy market waiting to happen.