The AUD/USD pair fell during the session on Tuesday as the pair continued to consolidate between the 1.05 and 1.06 levels. This market is very risk sensitive, and because of this it will be liable to react to headlines crossing the wires.
The most obvious area that we could see headlines come out would be the so-called “fiscal cliff” talks in the United States, and whether or not there is progress being made. The 1.06 level has been significant resistance in the past, so I think this would be a significant break out if we can get above that level. In fact, I believe it could be the beginning of the next "leg up" in this very bullish market.
On the downside, I see the 1.05 level as being supportive, but not nearly as much is the 1.04 level. Because of this, I think that selling this pair is going to bring limited opportunity, and as a result I'm essentially thinking of buying only at this point. I think I could get supportive action at the 1.05 level that would make me by, but in reality I would be much more interested in buying at the 1.04 level as it offers much more significant support.
Part of a larger consolidation
The current action is not only consolidation between 1.06 and 1.05, but it is also part of a larger consolidation area between 1.02 and 1.06 levels. Because of this, I suspect that a breakout above the 1.06 handle should see a move to 1.10 before it's all said and done. This would be based upon some type of very bullish action in risk assets around the world, but I think we've already seen the potential catalyst for this.
By "potential catalyst" I of course mean the Federal Reserve and its extension of monetary policy that was announced last week. It appears that the Federal Reserve is willing to take on an absolutely enormous balance sheet, and this of course is essentially the same thing as devaluing the US dollar. Add to that the fact that the Bank of Japan is getting ready to do the same thing, and you have a situation that is right for seeing higher commodity prices. One of the most visible commodities will be gold, and as a result the Australian dollar should do well over the longer-term.