Fading The Aussie Correction
The Australian Dollar is beneficiary to a combination of elements currently allowing the opportunity for higher prices: US rate hike expectations have been pushed out into 2016 following the poor September jobs report ,which marked a fourth consecutive low ,and the Doveish September FOMC minutes release which saw the Fed focusing on the weak inflationary and global growth environment. The subsequent weakness in the US Dollar has seen commodity prices rebounding, further supporting the Australian Dollar, whilst the recent stabilisation in China amidst an absence of further data weakness, combined also with speculation over Chinese stimulus, has also added support to the Aussie.
Despite the current strength, the moves in the Aussie can be seen as a correction within the long term down-trend that price has been travelling within since 2011 highs and as such, present good opportunity for an entry to the possible resumption of the down-trend, with COT data (as shown by our indicator) highlighting that Non -Commercials (Banks & Institutions) alongside Hedge Funds remain net-short the Aussie, suggesting further downside is to be seen.
With fundamentals supporting the Aussie remaining so tentative, there is plenty of scope for a lower rate if any of the above factors reverse which could come in the form of stronger data out of the US, weaker data out of China and a fall back in commodity prices. Attention must also be paid to the RBA who, although maintained rates and a neutral tone at their most recent meeting, will be keeping an eye on AUD strength and may be forced to act in the absence of a US rate-hike.
The base of the consolidation put in between January and July of this year represents strong technical resistance, with a low of .7536 also marking the 50% retracement from the May high. A retest of this base will likely see decent selling interest and will be a key area to monitor price action and Order Flow signals to position for a move lower targeting initially a move back down into the 2015 lows of 0.69.
The key to this trade will be monitoring market reaction as we test the first level as we could correct deeper and see a move higher into the broken range, possibly challenging the 76.4% retracement level and horizontal resistance against the February and March highs. Depending on where we get an entry, stops will be above the recent swing high.