Over the past few months, the U.S. dollar experienced a significant sell-off. The dollar index hit one-year lows and has seen the most significant loss against commodity-based currencies, such as the Great Britain pound (GBP), Australian dollar (AUD), New Zealand dollar (NZD) and Canadian dollar (CAD). Recovery from the global economic crisis has not arrived, at least according to the past month's economic reports. Even though economic recovery isn't apparent yet, inflation concerns are creeping into central banks' commentary and influencing monetary policy.

The U.S. has been the most active in intervention and stimulus during these economic times, which means it has pumped the largest dollar amount into the global market. As this money hits the global market, the dollar will weaken further and inflation will become more and more of a probability. The past two months' price action is a strong indication of the impending inflation. Historically gold receives the strongest boost in times of inflation and the Australian dollar is the major currency most correlated to gold. By buying Australian dollars and selling U.S. dollars, an investor simultaneously capitalizes on the aussie's strength and the greenback's weakness.

If you haven't noticed there has been a similar strand of logic and focus on inflation and commodities in the previous three articles. This is because central bank monetary policy and inflation are long-term trends and cycles, providing ample time to find and set up trade opportunities based on fundamental and economic principles. Instead of looking at the GBP/CHF, as was the focus last month, this month's focus is on gold and the Australian dollar. During the past quarter, the Australian dollar experienced a significant rise against the U.S. dollar, finding strong support levels near 61 and 63 before rising more than 1,500 pips to 78 (see Figure 1). There has been some expectation that the dollar has been oversold in the past couple of weeks. This works out well because a trend line support level and the 61.8% Fibonacci level may coincide on a pullback near 75, providing a better risk-controlled entry as a trend bounce. If the pair bounces at 75, followed by completing the 100% Fibonacci retracement to 84 and a stop was placed below the 50% Fibonacci trend line, a better than 3-to-1 reward-to-risk ratio would be established. The pair could run well past 84 to last year high at 98 if inflation remains an ongoing concern.

Figure 1 -- AUD/USD Rising with the Potential of a Pullback to Trend and Fibonacci Support

The AUD/JPY pair has a similar price pattern. As discussed in last month's article, the pair reached the 73 resistance line and a possible run higher has now appeared. As shown in Figure 2, price is at the 50% Fibonacci level. A break above the 61.8% Fibonacci level with a stop below the 50% Fibonacci level will provide the better than 3-to-1 reward-to-risk ratio with a target of nearly 1,200 pips. This pair needs to move more before confirming such a trend, which makes the AUD/USD, mentioned above, a more near-term probability.

Figure 2 -- AUD/JPY Testing Support at the 50% Fibonacci Level in a Strong Uptrend

The above examples can be traded using the forex spot market or combing futures properly via futures by buying Australian dollar futures (/6A) for the AUD/USD pair and Australian dollar futures (/6A) and selling yen futures (/6J) for the AUD/JPY pair.

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