The recent volatility has seen AUD carve out a wide range which may favour range trading strategies, assuming we don’t see a bullish break
Be on guard for retracement on the higher timeframes
Most analysts seem to agree that on the longer-term USD is poised for further highs and AUD could see further weakness. My USD cycles point towards the next major trough (cycle low) around mid 2017 which could leave another year or so of solid gains for the Greenback, albeit some corrections.
Over the mdeium-term however we could be in for a bullish retracement on AUD if the wheels start to fall off of the FED rate hike. I have long thought (and continue to beleive) that this is a likely scenario, which has only been reinforced since the FOMC meetings.
If we take a look at the monthly charts you’ll notice we are within the most bearish decline (in pips) since 2008. Whilst this itself does not raise alarm of a market bottom we should take note that it has effectively traded sideways since RBA cut rates and meandered around the 200 month MA. So whilst the decline has slowed down when rates have hit as bottom we really need USD to decline with force to see money flow back into the A$ and to defy the RBA (who will no doubt be forced to eventually cut rates, when FED do not..).
It is interesting to note that large speculators have increased long positions by over 200% last week before the FOMC meetings (and the subsequent AUD rally), despite RBA leaving further rate cuts on the table.
Trading within wider range of 0.7550 – 0.7912
Increased volatility at the multi-year lows has carved out a wider range between 0.755 – 0.7912. At this stage we do not know if we are within a large move down or if we will remain within this range, with choppy trading.
The bears may argue that price has not breached the 50 SMA since Sep ’14, however today’s high has already tested it. If we do see a break above this level I would expect 0.7912 to cap as resistance upon first test. Therefor I favour range trading strategies where we can fade into rallies below 0.7912 to target 0.774 initially. A break below here could target the 0.760 and 0.755 areas.
Whilst above 0.744 we could consider buy-setups to target the 0.7912 highs. As this is against the dominant bearish trend I would prefer not to buy near the multi-year lows of 0.755, instead preferring to fade into rallies up towards 0.774 (as this is the bottom half of the wider range).
Above 0.7912 could test 0.830
For price to break 0.7912 this week I can only assume it to be particularly soft data form the US. If inflation and growth data comes in weak enough then traders are likely to reinforce their own views of a much later rate hike from FED, resulting in AUD visiting 0.83 over the coming week/s.