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AUD/USD Channel Limit’s Upside Potential

AUD/USD Channel Limit’s Upside Potential

2010-07-08 19:16:00
John Rivera, Currency Analyst
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Risk trends continue to favor the high yielding Australian dollar which has the AUD/USD in the midst of an ascending channel. After finding support at the lower bound the pair is now targeting a test of resistance as optimism is gaining momentum on the back of a rosier growth picture from the IMF. The global lender of last resort raised its forecasts for global growth in 2010 to 4.6% from 4.2% due to strong Asian growth to start the year. The Australian economy has been a primary beneficiary of increased Asian demand which has led to the RBA raising its target interest rate to 4.50%-the highest amongst the majors. Although policy makers kept rates on hold at Tuesday’s policy meeting, their post release remarks had a more hawkish tone than expected, raising the outlook for additional hikes. Higher interest rates only benefit the antipode‘s currency when traders are willing to take on risk, if concerns over future growth re-emerge then we could see bearish AUD/USD sentiment return. The 200-Day SMA at 0.8975 is converging with trend line resistance and could prove to be a pivot point, leaving the pair within its current formation.

Levels to Watch:
-Range Top: 0.9000 (Trend, SMA)
-Range Bottom: 0.8400 (Trend, Pivot)

RANGE-10-07-08-01

Suggested Strategy

Short: Place an entry at 0.8950-above 6/21 high, below 200-Day SMA at 0.8975
Stop: Set the stop to 0.9050-above trend line resistance
Target: The first target is 0.8800-1.5 times risk

Trading Tip – Getting a handle on risk sentiment has been tricky and the odds that we see our entry point met are the same as those for a premature reversal. Given the strength of risk appetite and Australian fundamentals further bullish momentum can be expected. However, we will watch the 6/21 high of 0.8861 and 0.8900 as potential pivot levels and entry points. We don’t expect domestic fundamentals to have a significant impact on price action until the RBA’s Board minutes on July 20th, which will leave price action at the mercy of broader trends. Watch for the news cycle surrounding the European bank stress tests as it could impact broader sentiment and provide false moves, which should be discounted when deciding when to take a position.

Event Risk for Australia and U.S.

Australia – Australia's outlook for growth and inflation will help shape future monetary policy and the prospects of the domestic economy. Therefore, the upcoming Westpac confidence survey and the inflation expectation report will be the key market moving events ahead of the central bank’s minutes. A rise in the outlook for price growth could set the stage for an RBA rate hike and generate Aussie support.

U.S. – Positive reports on domestic demand helped spur risk appetite over the past few days, which increases the importance of the upcoming advance retail sales report for June. ICSC same store sales reported a 3.0% increase from a year ago and continued signs that consumer spending remains strong will raise the outlook for the U.S. economy. Markets have been looking for evidence that Americans are ready to take the torch of spending form the government which will be required for a sustainable recovery. Meanwhile, the manufacturing sector has been the main driver of growth in the U.S. and global economy. The industrial production report for June will be a key gauge as to whether demand from abroad continues to spur activity and if the sector remains a source of growth.

RANGE-10-07-08-02

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