The Australian dollar has been the strongest major currency over the past seven weeks, but a few technical cracks are starting to appear that may portend a correction lower.
The AUD has risen over 7.0% against the USD since the start of February, and a staggering 16.6% against the JPY nL3N2VV0TM, benefiting from rising commodity prices and large carry-trade demand from investors seeking high-beta strategies to offset the jump in inflation nL3N2VQ0LI.
The speed of the appreciation has left AUD/USD technically overbought. While a trending currency can remain overbought for an extended period, it does become vulnerable when the market starts to turn.
The daily slow stochastic study for the AUD/USD has crossed and turned lower from an extremely overbought reading above 95 and is currently below 80 despite the pair hitting a five-month high on Monday.
This suggests slowing momentum and exhaustion.
The AUD/USD also completed a bearish outside day reversal on Monday, closing below Friday's low after hitting the five-month high at 0.7540 earlier.
A Tuesday close below the 10-day moving average, currently 0.7444, would indicate a possible top is forming and a correction is underway.
A shallow correction targets the 21-DMA average around 0.7365, while a deeper correction could see a test of the key 200-DMA around 0.7300.
Selling AUD/USD with a stop above the Oct 28-29, 2021 trend high at 0.7555 is the favoured short-term strategy.
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