AUDUSD: Goodbye Somber September, Hello Optimistic October!

Beyond extreme Halloween enthusiasts, AUDUSD bulls are probably more excited than anyone to turn the calendar page over to October. The month of September did not treat the Aussie well at all, with the currency falling nearly 600 pips over the course of the month, though some traders are starting to wonder whether September’s swoon may have reached excessive levels.

Unfortunately, October started off on the wrong foot from a fundamental perspective. As my colleague Chris Tedder outlined earlier today, both Australian retail sales and housing data came out below expectations in today’s Asian session. These weak economic reports pushed AUDUSD to within 5 pips of its four-year low at .8660, but buyers stepped in aggressively to defend this key floor. Rates have now bounced 90 pips off the intraday low and have nearly turned positive on the week.

As we often note in these reports, one of the most reliable signals in the market is when price action and news diverge; in this case, the bearish economic data has not led to a commensurate bearish move in the exchange rate. These types of reactions are often seen at “exhaustion points” the mark a potential end to an extended trend.

From a more traditional technical perspective, today’s price action is currently showing a Bullish Pin Candle*, or hammer formation, on the daily chart. This candlestick pattern shows a shift from selling to buying pressure and is often seen at near-term lows in the market. Meanwhile, rates are also peeking above the bearish trend line that guided prices lower throughout all off September’s selloff.

The secondary indicators are painting a mixed picture. Not surprisingly, the MACD continues to trend lower below its signal line and “0” level, showing established bearish momentum. However, the more sensitive Slow Stochastics indicator is showing signs of turning higher from oversold territory, suggesting that the selling pressure is starting to wane.

Despite these potentially bullish signs, more conservative traders may want to wait for a confirmed break of the trend line before turning remotely bullish. If we do see a rally through the trend line, a more substantial bounce toward previous-support-turned-resistance at .8885 or the 38.2% Fibonacci retracement of September’s drop at .8945 may be seen. Meanwhile, a break of the 4-year low at .8660 would herald another leg lower in the pair, potentially toward the longer-term Fib retracement at .8540 (not shown) in time.

*A Bullish Pin (Pinnochio) candle, also known as a hammer or paper umbrella, is formed when prices fall within the candle before buyers step in and push prices back up to close near the open. It suggests the potential for a bullish continuation if the high of the candle is broken.

Source: FOREX.com