AUDUSD Channel Stands to Benefit should a Reversal in Risk Appetite Hold Off

How stable is the AUDUSD Range? •    Levels to Watch: -Range Top:       0.9300 (Pivot, Reversal) -Range Bottom: 0.8910 (Trend, Fibs) •    Risk appetite (and subsequently the US dollar) came one step closer to reversing course over the past 24 hours after the RBA toned down its hawkish rhetoric and subsequently cooled speculation of steady rate hikes. However, this curbs the highest upper end of expected returns but doesn’t fully alter the outlook for risk appetite. So, while the market is slowly correcting, a true trend change will likely require a major fundamental catalyst. •    Holding out on a true reversal is made more realistic through the technical backdrop on AUDUSD. This pair has carved an uncannily stable bullish trend that has not developed any serious setbacks through its development. This could be an argument for an overdue pullback; but as long as the rising trend holds, the dominant bias will maintain the bearing. Suggested Strategy •    Long: With a short-term bear trend developing an aggressive entry at 0.8940 is reasonable. •    Stop: Setting a stop below the rising trend at 0.8865 is the ultimate objective. To secure profit, move the stop on the second lot to breakeven when the first target hits. •    Target: The first objective is greater than initial risk (135) at 0.9075. The second is 0.9150.

Trading Tip – Risk appetite took another hit this morning with a sharp decline in Asian and European stocks that spread quickly to the FX world. Though not all of the majors were producing prominent, dollar-bullish breakout, EURUSD would force a multi-month rising trend that would subsequently be translated into a similar push for the dollar index. When the market’s most liquid major produces a potentially trend changing event, the rest of the market takes notice. However, this move can certainly be snuffed out should the fundamental fuel not develop in support of such an effort (this is how false breakouts are born). There are a number of heavy weight economic indicators due through the remainder of the week; but there are serious doubts as to whether they can realistically alter the outlook for the broader markets. The FOMC and ECB rate decisions are expected to hold course or perhaps make small steps towards reining in liquidity. Friday’s NFPs has been a disappointment in market moving impact as the modest improvement of monthly job losses doesn’t absolve the fact that unemployment is still rising. One release that is concerning though is the BoE’s meeting on Thursday. Should they increase their bond purchases, it could lower rate forecasts; pause it or call an end and investors may fear that the bank hasn’t done enough to revive the economy. With this event risk in mind, we will close all open orders before the BoE’s rate decision and watch any live positions that are on during the release. It is also notable that while our stop is below the trendline, it is also very tight and could be run should volatility leverage a false breakout.

Event Risk for Australia and the US

Australia – Top event risk has come and gone for the Australian dollar; and the affair would certainly leave its mark on the currency. The RBA announced early Tuesday morning that they would hike the rate for the second consecutive month to 3.50 percent; but the commentary that would accompany the release would have a decidedly restrained tone to it. Considering the Aussie dollar’s primary appeal for currency traders is the prospect for higher returns, this reality certainly cast doubt over the balance between demand and current level of the currency. We will look to Friday’s RBA Quarterly Monetary Policy Statement for a better gauge of policy pace.

US – What could have been the top economic indicator for the US dollar and broader market has already come and gone. The advanced reading of 3Q GDP reported the world’s largest economy pulled itself out of recession in impressive form. Consumer spending, residential construction, investment and government spending all contributed to the strongest pace of growth in two years. However, there are nuances to this data (like the personal spending figure largely reflecting the impact of the ‘cash-for-clunkers’ program) that suggest this is not the birth of an astonishing period of growth just yet. For this reason, next week’s more timely data could in fact make for a better catalyst for trend development. Next Friday’s non-farm payrolls data is clearly the headline; but the FOMC rate decision, ISM services surveys, and consumer credit and spending figures should all hold weight.

Written by: John Kicklighter, Currency Strategist for DailyFX.com
Questions? Comments? Send them to John at jkicklighter@dailyfx.com.