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AUD/USD Channel Warns Of Bearish Potential

AUD/USD Channel Warns Of Bearish Potential

2010-03-31 19:36:00
John Rivera, Currency Analyst
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How stable is the AUD/USD Range?
 Levels to Watch:
-Range Top:       0.9250 (Trend, Pivot)
-Range Bottom: 0.8500 (Trend, Psychological)
• RBA tightening and signs that the global recovery is keeping pace has helped push the high yielding Aussie higher. Also aiding risks sentiment is the resolution to Greece’s troubles. However, an expected RBA pause and weakening fundamentals could breed pessimism and a reversal of the carry trade.
• The AUD/USD is trading up against medium term trend line resistance (11/16,1/14,3/17 Highs) near 0.9250 which offers a major barrier. There is a shorter term range that is also developing between 0.9000 and 0.9250. We are also seeing the 50-Day SMA as a possible support level at 0.9003.We will use this range in developing the current set-up, but we have showed the broader trend channel to display the greater potential.

Suggested Strategy
• Short: Place an entry at 91.30 below today’s low(0.9131) and the 20-Day SMA(0.9141)
• Stop: Set the stop to 0.9230.-100 pips in risk and above the 3/30 high
• Target: The first target is 0.9000, However, I will also consider 50-Day SMA currently at 0.9000 followed by 0.8800-2/25 low.
 

Trading Tip – The Australian dollar has benefitted from continued demand for risky assets which and with fundamental data continuing to improve, further upside can’t be ruled out. We may not see the sharp reversal in risk appetite that may be needed to make our trade profitable but instead a continuation of choppy price action as traders wait for a clearer picture to develop. The upcoming U.S. Non-farm payroll report and next week’s RBA rate decision present significant event risk and if they generate the needed price action to trigger our trade, remain cautious as we often see post release moves quickly reversed. An additional dynamic to be aware of is that U.S. markets will be closed during the U.S. labor report release which could lead to thin volume and will make currency markets susceptible to large price swings. Therefore, any moves may lack validity in determining whether a longer-term trend is developing. A hold at 0.9000 could lead to an extension of the current short-term range. A break of the psychological level exposes considerable downside risks and limited leverage should be employed until a longer-term bearish trend is confirmed.

Event Risk for Australia and U.S.

Australia – Manufacturing and trade data will be the most immediate event risk but the release will be overshadowed by the looming RBA policy rate decision. Signs that exports and output continue to make strides could raise the outlook for another rate hike by the central bank. However, signs that demand from abroad is waning will raise concerns that the global recovery is stalling which will confirm expectations that policy makers will pause their tightening policy. As China takes measures to slow their domestic economy growth expectations will dim for the antipode nation which already has the highest interest rate of the developed economies.

U.S. – Following the weaker than expected Chicago PMI reading a disappointing ISM manufacturing report will fuel fears that the sector is starting to slow as inventory level have been replenished. A lack of domestic demand has led to the service sector lagging behind and if the driver of the recovery shows signs of slowing then the outlook for employment and consumer spending will take a hit. Therefore, the upcoming Non-farm payroll report will have a significant impact on the outlook for future growth. Forecasts are for the economy to have added 180,000 jobs in March which would be the highest level since 2007. However, many of the new hires are attributed to the 2010 census which will lessen its significance in determining the longer –trend.

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