With the prospect of a Fed lift-off having moved ever so slightly out of the limelight now given the recent spate of soft US econ data, I thought this would be a good opportunity to take a look at some opportunities created in the wake of this USD unwind.
The Aussie Dollar has come into the spotlight recently having managed to fight its way back up from yearly lows. It’s high beta status has made it one of the best performers on the back of the recent USD unwind and indeed, with a strong March employment report and better than expected CPI figures, there is certainly some support for AUD currently.
Most notably, AUD has been benefited from increased carry trade demand in the face of ECB & BoJ QE programs driving investors to seek yield from the Antipodean currency.
There are however, headwinds facing the Australian Dollar. China, Australia’s largest trading partner has been suffering a big slow down in growth recently, reducing Australian exports, which has weighed heavily on the currency, alongside falling commodity prices on completed exports which have reduced Australia’s terms of trade.
However, it was announced this week that China will cut the reserve ratios for domestic banks in an effort to stimulate lending. This easing should create some support for AUD as China’s import market will likely increase.
The RBA surprised markets by standing pat at the recent CB meeting but in the minutes released this week, Governor Stevens added some fuel to market dovishness by stating that a May rate cut is still a possibility. Obviously, these comments were made before the recent CPI beat which may act to deter a rate cut at the next meeting.
Markets are pricing in a further two rate-cuts this year and consensus is built around a May date being one of those cuts, so there is some room for upside surprise if the RBA don’t infact cut in May.
Is there room now to look at some AUD long opportunities?
The latest COT data shows that AUD short positioning has decreased sharply and indeed our COT indicators have crossed to the upside in AUDUSD, but for strength, creating scope for some positive momentum.
From a technical perspective, AUDUSD might appear to have built a solid base at current levels. Price has bounced back off yearly lows and has broken through the descending trendline from last year’s highs.
However, whilst the resistance zone at .7890 – .7940 remains unbreached, we are seeing nothing more than range bound consolidation following the last few months downward trend.
Given the market’s explicit orientation towards a “wait and see” approach to USD longs, any positive data out of the US should see the pair lower and with the overall trend still down, monitoring price action as we test the resistance levels should offer better risk:reward to set shorts in play.
However, there is definitely scope to play AUD longs elsewhere.
Given the ECB’s QE program has been driving investor outflows from Europe, carry trade demand suggest that EURAUD should continue to suffer from AUD strength and so this is certainly a pair to monitor for potential short opportunities.
From a technical perspective we have seen the pair break down through the long term ascending trendline and indeed fail on an attempt to reclaim the trendline. Price is now sitting precipitously atop key long term support,a break of which opens up a near 800 pip downside run to next support.
If we do see a bounce from current levels we should find a great selling opportunity as we re-test the broken ascending trendline and the recent downward trendline from December highs.
Indeed, our Implied COT indicator which perfectly caught the upside action in 2013 and likewise has perfectly caught downside action from mid 2014, suggests that Bank & major institutions are positioned for downside in this pair.
VWAP which has also been catching the recent swings fantastically well, is currently negative, suggesting downside is likely to materialise and so we should keep a close eye on this pair.
Support is at the major horizontal line highlighted and the lower channel line. If we break this horizontal support, we may see a slight bounce from the lower channel line which will also set up a good selling opportunity on a retest of the broken support.
VWAP is a fantastic indicator to use in trying to trade with trend, check out this short video and see.
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