Fundamentally the card hasn’t changed. A report in the Wall Street Journal puts the QE2 number at $500bn. With M2 money supply currently at $8.6 trillion another $500bn is an increase of 5.7%. If this process is completed over several months there is potential annualised money growth could be close to 17%. This combined with the trillion dollars sitting on banks’ balance sheets as excess reserves could cause some serious inflation and ultimately lead to USD devaluation of a golden order. Do not get blindsided by the obvious, price action does not always follow the underlying view. We believe it likely the Australian dollar could pull back to 0.9501 or even 0.9220 before heading higher, our bias is isolation above 0.9501 and a return to the uptrend but every parabolic move is followed by a period of tempering, here are our reasons why.

Daily chart Technical Analysis:

1. Orange lines are of equal length indicating the completion of a perfect 3 (Move X to A to B to C)
2. Extension of the range from X to A plots the 161.8 at 0.9921 and extension of the range A to B plots the 261.8 at 0.9953. I would say this is confluence of resistance.
3. Price is now consolidating at this resistance level ahead of likely USD depreciation; a natural retracement would be a move to confluence of the 161.8 extension of the A to B range at 0.9501 and the 38.2% retracement for the B to C range at 0.9501.

Reminder all bets are off heading into the FOMC meeting November 3rd, if price is isolating around 0.9501 – enjoy.

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