AUD/USD Channel Signals Potential Return of Risk Aversion

The Australian dollar has seen support throughout July as strong corporate earnings and fading concerns over Europe have fueled broader optimism. The AUD/USD has seen its correlation with equity markets strengthen to 86% as the high yielder continues to benefit from risk appetite. Australia’s target rate stands at 4.50% which places it easily at the top of the majors and the most attractive for traders. An improved outlook for yields is also adding Aussie support following the RBA’s minutes from their last policy meeting as they left the door open for another rate hike. The central bank will look to the upcoming RBA rate decision for guidance on whether to continue tightening. Yet, with risks trends holding such considerable sway over direction the end of earnings season could lead to profit taking and a flight to safety, keeping the AUD/USD confined to its current channel.

Levels to Watch:

-Range Top: 0.9150(Trend, Pivot)

-Range Bottom: 0.8475 (Trend, Pivot)

Suggested Strategy

• Short: Place an entry at 0.9200
• Stop: Set the stop to 0.9300-100 pips in risk
• Target: The first target is 0.9000 followed by 0.8737-7/22 low

Trading Tip – The AUD/USD could already be at trend line resistance if we draw the upper bound form a lower base which should keep traders alert for a reversal. An intra-day head $ shoulder’s could be the pivot that we are looking for and if we see the pair fall below 0.8950 then we would consider a short at that level. However, risk appetite has been firm and expectations are for inflation to accelerate above the RBA’s target range of 2-3%, potentially returning bullish sentiment. We would wait for the post event risk price action to settle before taking a position. The 100-Day SMA at 0.8866 could be a potential support level to watch with the 20-Day SMA at 0.8729 as the next barrier.

Event Risk for Australia and U.S.

Australia –Minutes from the RBA’s last policy meeting, where they left rates unchanged, indicated that the central bank will look to the upcoming second quarter consumer price index report as a guide for future monetary policy. Expectations are for inflation to have accelerated by 3.4% from 2.9% the quarter prior, which would place it above their target of 2-3%, raising the outlook for a rate hike and potentially providing Aussie support. Slower than expected price growth could sink the commodity dollar as speculation will rise that the RBA’s tightening cycle may come to an end.

U.S. – The U.S. durable goods orders for June are forecasted to increase by 1.0% which isn’t enough of an improvement to impact long-term outlooks, but if there is prevailing risk appetite the positive fundamental release could provide a boost. However, a shortfall in demand will add to the declining growth outlook for the U.S., potentially generating a flight to safety and dollar support. Meanwhile, the pace of U.S. growth in the second quarter is forecasted to have slowed to 2.5% from 2.7% the period prior. Dissipating government stimulus and the end of the inventory cycle are expected to have weighed on output with the consumer not yet ready to take the torch of spending. Signs that the weak labor market is having a greater toll on the economy would sink U.S. interest rate expectations further and potentially weighing on the dollar. However, an ensuing flight to safety could derail the Australian dollar and sinking the pair.