In last week’s Trading Tutors newsletter, I discussed the interesting movements on the Euro/US Dollar currency pair (EC-Spotv in ProfitSource). The main point was that we have known for several years that both the US and Europe have significant debt challenges and yet the media only ever seems to focus on one at a time – whichever is the ‘flavour of the month’. This is highlighted by Chart 1 below:

Chart 1

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click to enlarge

This chart reflects the value of the Euro compared to the US Dollar. In July, 2008, one Euro bought just below 1.6 US Dollars. In June, 2012, one Euro only buys 1.2 US Dollars. Notice the sharp moves up and down over the past four years. It’s almost as if the whole world revolved around the European debt crisis before shifting attention to the US and then back to Europe once more. This focus has shifted half a dozen times or more in the last few years.

It is interesting to note that in the year-to-date, most of the media focus has been on Europe, while the US debt has continued to grow quietly in the background. In fact, the total value of US debt has increased by 20% in the past two years to its current value of 15.7 trillion dollars. Take a moment to reflect on that number and then try typing it onto your calculator - $15, 700,000,000,000 (my calculator only goes to 12 digits, so the number didn’t fit!) This debt figure is up from approximately 10.6 trillion dollars when President Obama took office in 2009.

And yet when we turn on our televisions or log on to media websites, all we hear about is Europe, Europe, Europe! Cast your mind back 12-months ago, when the US very nearly defaulted on its debt and was only saved by a last minute agreement to increase their debt ceiling. The US debt has increased since then but if you weren’t specifically looking, you probably wouldn’t know because the media hasn’t been talking about it.

If history repeats, I expect it won’t be very long before the flavour changes once more and we stop hearing about Europe and begin to focus on the US again.

Last week, I suggested that if the focus does indeed switch back to the US as they approach their latest debt ceiling of 16.4 trillion dollars (which current estimates suggest may occur within the next 6-12 months), then there may be an interesting currency play involving a much smaller country than the US, a currency that has very little debt in comparison to the greenback.

If you haven’t guessed, I am talking about the Australian Dollar. I won’t go into all the fundamental reasons that support the Australian Dollar against the US Dollar but the current technical position of the Aussie Dollar is shown in Chart 2 below:

Chart 2

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click to enlarge

The Aussie Dollar has fallen quite heavily since the February 29 top this year and at one stage looked set to fall out of bed in a similar fashion to the GFC crash of 2008. However, the Aussie Dollar has found support around the levels of the old 2008 top. Basic technical analysis tells us that old tops can become new bottoms and the Aussie Dollar has certainly tested this old top on several occasions over the last two years.

If the Australian Dollar can make a higher swing bottom on the weekly swing chart, then it is in a strong position to begin its next move up. And if the focus of the world switches from Europe back to the US, as it has done so often in the past, then we may see a sustained bull market on the Aussie Dollar for the next couple of years.

It goes without saying I will be watching the Australian Dollar very closely in the next few months!

Be Prepared!

Mathew Barnes