Head and shoulders pattern in AUD/USD is worrisome

Head and shoulders pattern in AUD/USD is worrisome

The risk mood continues to sour and this chart is getting lots of attention. It shows what looks like a text book head-and-shoulders pattern shaping up in AUD/USD.

The kneejerk take is that it's a bad sign for global growth and risk assets. The measured target of a break of the neckline would be around 0.7150. Combine that with what we're seeing in Chinese markets, tech and broadly worsening sentiment and it doesn't look great.

On the other hand, the virus hasn't bothered markets for six months, why should that change now? Maybe it's just a quarter-end hiccup and markets roar back to life in April. I'm sympathetic to that view because the macro backdrop is so plum.

Another theory worth exploring is that it could simply be a USD move. There's a good argument for it that I've been making since the start of the year.

  1. US growth will far outpace everywhere else
  2. USD positioning is still extremely negative
  3. The outlook is worsening for some emerging markets on covid resurgence
  4. The tech/SPAC bubble is a mess
  5. Higher US yields unwinding (if not reversing) the carry trade

What if the US dollar is the big macro story that everyone is missing? A 4-5% rise in the dollar and perhaps an overshoot creates its own set of problems.