The AUD is becoming extremely overbought. (update 3)

Export giant Brazil has now made the assertion that a 'currency war' is now occurring. So at this point we have now the commodity producing countries beginning to devalue their currencies in tandem. Except for Australia, as the Australian perennial bull central bank (RBA) has reignited hopes (for bank FX traders) that a interest rate cycle is about to begin (yes begin!).

Although if buyers of cheaper put positions are hedging against overstretched long positions (institutional investors) to be cut, they maybe in luck. Most traders even economists brushed over the July 2010 terms of trade that showed exports flattening out and imports dropping, in other words the Australian economy is slowing. The RBA rhetorical came from their bizarre mantra that on low export volumes but higher costs of exports (raw material) to China, the Australian economy may be able to sidestep a global slow down going into 2011. But the RBA/Australian government is now faced with commodity producing countries selling their currencies in an effort to devalue (FX protectionism). As discussed in Market is overpricing risk (update 7) - Dow volume diminishing, traders are underestimating massive goverment intervention (FX) Colombia was the first after Japan's intervention. Now we have Argentina and Brazil following suit

This means that competitiveness is dropping on pricing as a deflation in currencies make the buyers, of your exports, more attractive.

So we have consolidation (5 trading days) after touching the resistance of 0.96 (AUD). The market is awaiting the October 5th RBA decision on interest rates. Volumes have thinned out as trades have tightened in expectation for a rate hike at 0.25% this may have already been priced in 0.95 0.96 range.

The beauty of all this is that if the South America export powerhouses devalue currencies and compete to keep China's interest, the Europe Zone debt markets implode into the last quarter of 2010. A major sell signal will light up on a possible reassessment of holding off tightening the AUD cash rate.