Pending Short AUD/USD. Prices at Risk to Stocks, Higher BoC Rate

2018-10-25 01:45:00 Daniel Dubrovsky, Strategist

AUD/USD Trading Strategy: Pending Short at 0.70839

Australian Dollar seems to be heading lower again as Wall Street selloff intensified
The BoC rate hike and emerging market fears may keep pressing the pro-risk Aussie
I am pending short AUD/USD at 0.70839 as prices are under my optimal entry point

We just released our 4Q forecasts for equities in the DailyFX Trading Guides page

Fundamental AUD/USD Short Argument

When we last examined the fundamental bearish argument for the Australian Dollar, much of the risks outlined followed through. Italian budget concernswidened the spread between local and German government bond yields further. Hawkish FOMC meeting minutes kept rate hike bets afloat despite a selloff in global stocks. The MSCI Emerging Markets Index added about 10% to its losses as new 2018 lows were hit.

Recently, we saw Wall Street close more of its divergent performance with developing nations as the S&P 500 tumbled about 3.09% in a day. This now places it, the Dow Jones and NASDAQ Composite close to wiping out most of their upside progress seen this year thus far. Looking at the chart below, I have overlaid the pro-risk Australian Dollar over the S&P 500 and emerging markets so that you may see this dynamic.

AUD/USD Versus Risk Trends

Chart created in TradingView

The road ahead for the Aussie is still at risk to familiar fundamental pressures. There are a couple of additional weights though. For one thing, the Bank of Canada has just raised rates from 1.50% to 1.75% as it held on to a hawkish outlook despite recent weakness in inflation data. This means that the Canadian Dollar is no longer at parity with its Australian counterpart, CAD now has a yield advantage over it and it may keep growing.

This puts the RBA in fourth place for the highest associated interest rate in the developed economies spectrum. Given that yields are what makes currencies relatively attractive to investors, this bodes ill for AUD in certain situations. Still, the Aussie may continue moving with market mood and the threat of more weakness in stocks could undermine it. One near-term risk is the upcoming second round of Brazilian elections.

DailyFX Analyst Dmitri Zabelin will be previewing Brazilian elections and their impact on emerging markets on October 25th at 22:00 GMT

AUD/USD Technical Analysis and Trade Setup

With that in mind, my last attempt to capitalize on AUD/USD weakness did not work out as my entry order was not hit. I am now actively seeking a second attempt with the same trading strategies. Looking at the daily chart below, we can see that after a temporary correction, the December/May 2016 lows around 0.71452 held as resistance. The Aussie is now attempting to resume its dominant downtrend since earlier this year.

Clearing the current 2018 low at 0.70830 would then expose the August 2015 low around 0.69. With that in mind, I am going to use 0.71452 as my daily close stop. A push above that risks testing the descending February trend line. Meanwhile the August 2015 low would be a target. Using a 3-to-1 risk-reward ratio, we arrive at an entry point of 0.70839.

At the moment, prices are below my optimal entry point and an order has been placed to short AUD/USD at 0.70839. You may follow me on twitter @ddubrovskyFX for updates to the setup.