Analysing The Aussie: AUDUSD outlook

The Australian Dollar has come into the spotlight recently having recently made a rather relentless descent from its .81 recovery high straight back down into the bottom of the range it’s been trading in all year. There is great opportunity on the horizon here so I thought it would be nice to take explain exactly what I am looking at.

As the USD long trade unwound following the dovish March FOMC meeting we saw AUD appreciate considerably as US data continued to disappoint and USD longs were further unwound. The Aussies high beta status saw it benefit nicely from this positioning adjustment and recent data out of Australia had been supportive of the move.
However, the RBA has been in easing mode all year and having cut the Australian interest rate twice the downward trajectory was to be expected despite the initial counter-intuitive bounce we saw in AUD following the most recent cut in May.

At it’s latest interest rate decision meeting the RBA kept rates unchanged citing an improvement in the Australian economy (though at a” rate slightly below its longer-term average”). The RBA cited the recent decline in the AUD as it’s decision to leave rates unchanged whilst noting that although it had depreciated against the USD, it had depreciated less so against a basket of other currencies and that “further depreciation seems both likely and necessary, particularly given the declines in key commodity prices”.
Weakening commodity prices and continued slowing of growth in China both threaten the trading outlook for the Aussie with and with a Fed rate lift-off somewhere in the horizon, commodity prices are not likely to do any better.

Further RBA rate cuts could be needed if AUD is able to hold up at these levels, but even without them it is likely that there are enough factors to contribute to a further decline in AUD.

As we head into the summer months USD news is going to be even more important in determining the path of the AUD as traders try to corrrectly gaige the lift off and whilst this could prove the catalyst for a break lower, there is also the risk that disappointing USD news will see AUD recover once more.

Lets look at the charts

audusd1

Right now we are seeing COT positioning starting to come off the highs we had recently seen in AUDUSD.  Banks & Institutions had been increasing AUD long bets from Mid march and have now started to reduce these positions. We’re still a good few weeks away from seeing Non-Commercials cross negative on the COT indicator, but if AUD continues to contract in this triangle fashion we are seeing we are going to see a fantastic setup develop.

If you note the Order Flow Trader signals we have seen following each of the COT crosses over the last year you’ll see how it’s picked out the move beautifully. Using OFT signals in line with the COT indicator is one of my favourite trading strategies.

What’s The Trade?

So in terms of a bearish setup I am looking for AUD to continue to contract in this range, respecting the trendline formed form the 2015 high and I am looking for COT Non-commercial positioning to cross negative followed by an OFT sell signal to short the pair.

This is a very exciting opportunity so make sure to keep an eye on this and I will continue to update you.

Risk To This Idea

The markets neurotic reaction to the US data front means that if we see USD news disappoint, this will weaken the Dollar and without any significant deterioration in the AUD economy in the interim, Aussie pops higher.  I will then re-assess and let you know what I am looking for.

 

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