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Chart Of The Day: Australian Dollar Benefits From Russian Commodity Vacuum

Almost a quarter of Australia's GDP is generated by exports, very similar to Russia's. Therefore, the supply disruption to Russian commodity exports has boosted demand for Australian commodities.

When a country buys goods from Australia, it must first purchase the Australian dollar in order to pay for those goods, which boosts the value of the currency.

French President Emmanuel Macron is currently pressing for more severe sanctions on Russia following reports of atrocities committed by Russian troops in Ukraine. More stringent sanctions may further increase demand for Australian commodities and provide even more support for AUD.

There are additional concerns. Increased demand for commodities could exacerbate inflation levels, which may push the Reserve Bank of Australia to raise interest rates at its next meeting, especially now that the US Federal Reserve has started hiking rates there.

There are also technical reasons why the Aussie dollar will take another leg up.

AUD Daily

The AUD/USD completed a double bottom, whose height implies a 300 pip-plus target from the roughly 0.7300 points of breakout—aiming at above the 0.7600 level.

The AUD climbed for 7 out of 8 sessions when it completed the Double Bottom. When the price paused, it entered a formation in the shape of a pennant, a continuation pattern. Bulls presumably took a breather after a 370-pip surge from Mar.15 to Mar. 27. These traders may be locking in profits by liquidating earlier long positions, allowing new bulls to come in for the next leg.

Once the available supply—probably created by the early bulls who cashed out—is depleted, those who missed the first rally and want more contracts would be forced to raise their bids to find additional sellers who demand a higher price.

The breakout will likely set in motion a chain reaction which will push prices higher. Firstly a short squeeze from a return of the early bulls who got out. Secondly it will provide an invitation for those who sat on the fence till now.

Note, the pennant developed below the previous peak level, registered on October. That level may have contained sellers who remembered the 7.5% plunge. Those will create the aforementioned short squeeze.

The 50 DMA crossed above the 100 DMA, demonstrating that the current rally is not a statistical outlier but remains even when the averages are smoothed and when comparing those of different periods. Therefore, the 50 DMA climbing toward the 200 DMA promises a Golden Cross, one of the most famous positive technical signals monitored even by fundamental analysts.

Trading Strategies

Conservative traders should wait for the price to reach a higher peak and for the following correction to find support before taking a significant risk.

Moderate traders could wait for the same pullback for a buying dip, if not for confirmation.

Aggressive traders could enter a long position now, provided they accept the higher risk proportionate to the higher reward that goes with moving ahead of the market.

Trading Sample

  • Entry: 0.7500
  • Stop-Loss: 0.7475
  • Risk: 25 pips
  • Target: 0.7800
  • Reward: 300 pips
  • Risk-Reward Ratio: 1:12

Trading analysis offered by RobotFX and Flex EA.