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Bearish AUD/USD on Falling Carry Trade Premium

Bearish AUD/USD on Falling Carry Trade Premium

Tyler Yell, CMT, Currency Strategist


Point to Establish Short Exposure: Pull-back to 10-DMA 77.54 cents per AUD

Spot: 76.88 cents per AUD

Target 1: 76.25 US cents per AUD (October low)

Target 2: 75.71 US cents per AUD (July 5 low)

Invalidation Level: 78.84 cents per AUD (50-DMA)

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I remember when the Australian Dollar use to be a carry trade currency. That may be the phrase many traders tell their kids who pick up trading in the next decade.

After coming off the worst week of 2017, another leg lower may be in store for the Aussie. The argument for looking lower for AUD/USD comes after another leg of the long-term bullish AUD view is taken out. Let’s count the ways the long-term bullish view is evaporating at a time when the USD is beginning to look attractive on a trade reversal basis.

The most recent argument to be dismantled is that global capital flow will go to Australia on the basis of its yield advantage over the US. There are a few ways to look at yield advantages, but the easiest is to look at expected central bank rates in the future.

The Federal Reserve Dot Plot, an anonymous voting tool of Fed members to say where they think the reference rate should be in the future based on their understanding of the economy, shows a median dot for the end of 2018 at 2.125%.

The Australian Cash Rate futures market shows the expected RBA policy rate could remain under 2% at the end of 2018, effectively ending the Carry Trade for the currency historically most known within the G10 for attracting yield-hungry investors.

Add to the vanishing yield premium; the RBA remains hesitant to show any signs of shifting to a hawkish stance as most central banks have had to walk back their hawkish rhetoric due to an anemic economy.

Lastly, the commodity with the strongest correlation to the Australian Dollar, Iron Ore has fallen by ~25% since August and could continue to fall as China increases demands for high-quality Iron Ore ahead of a seasonal period of lower buying due to winter.

Many traders would argue that AUD/USD is oversold and profit-taking may ensue. That’s fair, but I would look to a corrective bounce to remain under 0.7750 to provide an opportunity to re-engage the short-term view or look for a November opening range breakdown to trigger a resumption lower. The lower band of support to watch may be the October 27 low of 0.7625.

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AUD/USD Chart with resistance at 77.54 outlined:

Chart created by Tyler Yell, CMT

IG Client Sentiment Highlight: Australian Dollar Set to Fall on Bearish Bias

AUDUSD: Retail trader data shows 53.1% of traders are net-long with the ratio of traders long to short at 1.13 to 1. The number of traders net-long is 0.5% lower than yesterday and 7.0% lower from last week, while the number of traders net-short is 7.3% higher than yesterday and 16.9% lower from last week.

We typically take a contrarian view to crowd sentiment, and the fact traders are net-long suggests AUDUSD prices may continue to fall. Positioning is less net-long than yesterday but more net-long from last week. The combination of current sentiment and recent changes gives us a further mixed AUDUSD trading bias.


Written by Tyler Yell, CMT

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.