A lot of interest will be focused around the AUD/JPY when trading begins this week. The AUD, which has rallied significantly against most currencies, is starting to show signs of weakness, most notably against the JPY as illustrated in the chart below which has formed a double top. In contrast, the JPY has shown signs of strength in currency markets, as that country begins to return to some form of normality following the tsunami and nuclear disaster. This combination of strengthening JPY and weakening AUD could lead to high volatility in the cross currency.
When the AUD/JPY broke below 86 at Friday’s close, it had penetrated the Double Top Pattern trough. A lot of traders moved in at this point, we at FX Strategy will be monitoring closely when trading resumes and any downward movement in the rate we will be jumping in.
Upon entering the trade, the profit target might be around 84.5 cents. Looking at the daily chart there are not many resistance points, so it’s possible it could fall quickly.
The chart also shows how difficult it is to trade with Bollinger Bands. Many traders who use Bollinger Bands exclusively as a trading technique would be going long at this point as the price as hit the lower band. However, since it coincides with a double top formation it is a very risky move. We believe Bollinger Bands should only be used to confirm a technical analysis pattern. In this case the Bollinger Bands confirm that the price is 2 standard deviations below the average price over the period.
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