But could there be another explanation, and what can change the outlook for the Aussie.
It’s not so long ago the Aussie was being called the Pacific peso, now its around 17 year highs.
Is that a reflection of Australia’s strong economic performance and the resources boom, or some other factor?
Can the answer be found in the value of the $US and what’s happening in the world’s largest economy?
Perhaps but Nick Radge, our occasional chartist, thinks he has found another explanation.
……………………
What can change the outlook for the A$?
As technicians we do not concern ourselves with the never ending unknowns of what may or may not occur.
We’re only concerned with price action that validates or invalidates our chart patterns.
However, there is an interesting chart of the US Dollar Index that will have an impact on the Australian Dollar, especially for those subscribing to the concept that the Australian Dollar is actually not strong, but the US Dollar is weak.
The US Dollar Index is weighted average of six component currencies.
Contract calls for receipt/delivery of US Dollars or receipt/delivery of six component currencies.
The six currencies and their trade weights are: Euro — 57.6 per cent, Japan/yen 13.6 per cent, UK/pound 11.9 per cent, Canada dollar 9.1 per cent, Sweden/krona 4.2 per cent and Switzerland/franc 3.6 per cent.
The following chart shows the US Dollar Index back to the mid-80s at which time is was trending lower with almost unyielding weakness.
From 1989 through 1994 the Index more or less traded in a sideways pattern just above the 80.0 level before starting a multi year advance back to 120.0.
Since 2001 the Index has again dropped in a steep downtrend and again we find ourselves sitting right on the major level that supported prices from 1989 through 1994.
One thing we do know with technical analysis is that levels are reached that do mean something.
These levels tend to attract and repel prices and create areas of support and resistance.
In this case we’re seeing 80.0 tested again which in the past has acted as a serious level of support.
Is there an argument that 80.0 can yet again hold the US Dollar Index and reverse its fortunes? Quite possibly.
The one thing this chart does show is the high correlation between the Dollar Index and the current Presidential Party holding office.
For the last 20-years there has been a distinct bearish trend to the Dollar Index when Republicans have been in power and a distinct bullish trend when Democrats have been in power.
The fact that the Index is again probing the major support levels at $0.80 and that Bush Jr. is slowly but surely losing popularity and therefore quite possibly the 2008 vote, there is a good chance that we’re nearing the end of the US Dollar weakness.
Time will tell…
