"I have been following the progress of the AUD versus the EUR. Though the AUD is a volatile currency it appears to be showing signs of fatigue in my humble opinion. The backdrop of it being a commodity based currency remains positive but its relative attraction as a currency trade currency is diminishing as the prospects of rate raises in other currencies increase. I would appreciate your views on the currency.

"Keep up the good work."

David Fuller's view For perspective, I like to look at cross-rates both ways around so here are weekly charts of AUD/EUR and EUR/AUD. If you have been riding this commodity currency trend over the last couple of years, you have done exceptionally well.

Let us start with what we can see: The trend for the AUD's superior performance against the EUR has lost some consistency over the last ten months but not been broken, as you can see from the higher highs and higher lows (AUD), and lower lows and lower highs (EUR). However, the AUD needs to firm somewhat to reaffirm its choppy trend consistency since May 2010.

Now let us consider what we know, plus what we think we know. The hard fact: interest rate differentials favour the AUD by 375 basis points, making the EUR an expensive buy, if one was to reverse the position and the single currency did not appreciate. The trend tells us that people have been long AUD/EUR and there will have been some disappointment on hearing that Australian rates are now on hold following the damaging floods. Also, the ECB has said that it might raise rates to head off commodity inflation.

Lastly, psychology is so important in markets. For instance, is the EUR fatally wounded by the PIIGS, or has that crisis now given Germany an opportunity to turn the single currency into DEM-lite?

My conclusion - while the AUD has lost some uptrend consistency, this is not sufficient to signal a trend change. Even if the AUD were to top out in this region, my guess is that because of interest rate differentials and the commodity story, it would form more of a Type-3 (churning, time and size) top rather that the Type-2 (extreme reaction against the prevailing trend, plus some right-hand extension) top as taught at The Chart Seminar. I also think we have seen the best of the AUD's gains for a while.