Will the Aussie Hop, or will it Drop?
Eric Furstenberg • 3 min read
Yesterday was a pretty quiet day in FX, with all the majors recording inside daily bars – the AUD/USD being the only exception. This was the third consecutive Monday with very limited market movement. Perhaps market players are cautious of all the important economic data that lies ahead later this week. Or maybe they are just keeping some ammo aside for all the opportunities down the road.
The first important news we’ll encounter today is the RBA (Reserve Bank of Australia) rate decision and monthly rate statement later this morning at 04:30 GMT. Perhaps you will only read this article after the event has taken place. Nevertheless, there is definitely some explosive, market moving potential here. The RBA is expected to cut their interest rate by 25 basis points from 1.75% to 1.5%. If they shock the market by keeping the rate unchanged, expect to see an aggressive bounce in the AUD. Whatever their decision might be, be sure to pay attention to the rate statement, as many times this is more important than the decision itself. Here we get information about economic conditions that influenced the decision, as well as clues to what to expect at future meetings. Be prudent enough not to blindly sell the Aussie if they decide to cut the rate, as this does not necessarily mean that the currency will decline. Sometimes market participants price in future events, rendering them largely ineffective by the time they actually take place. And besides this, if the RBA delivers a rate cut, and perhaps indicate in their statement that they are not planning on further rate cuts soon, the AUD may produce a mighty rally despite the rate cut. I don’t think this is likely, however. Yet, we have to be prepared for anything. Let’s look at the AUD/USD:
AUD/USD Daily Chart
As you can see, the pair has been trading above its 200 day moving average (the black line) for quite a number of days. There is definitely some underlying strength in the AUD, and if we look at the weekly chart we can clearly discern that a bottom has recently been formed:
AUD/USD Weekly Chart
Yesterday, the pair printed a bearish daily candle. At the moment the pair remains supported by the 20 EMA on a daily chart. Of course, it is difficult to pre-position yourself for the expected action at the moment. Perhaps a better way to play the Aussie today would be by reacting rather than predicting.
Just a word of caution to the bulls – the short-term market momentum is bearish, and the price has hit a pretty solid resistance zone on the daily chart. Look at the chart below:
AUD/USD Daily Chart
We have also seen some impulsive selling in the last few hours with the bears driving the exchange rate right through some shorter-term moving averages. Look at the hourly chart below:
AUD/USD Hourly Chart
Just a few last words on the AUD/USD – retail sentiment is currently very flat on this pair, which is to be expected as the pair has been trading quite sideways for a while. Perhaps the RBA meeting will change this, however. At the moment it is just difficult to commit to a particular side of the market.
Let’s further examine some majors…
The USD/CHF received quite a blow on Friday. What actually caught my attention was that this impulsive decline was coupled with above average trading volume on the day. See the chart below:
USD/CHF Daily Chart
Strong directional days like this with above average volume normally indicates the determined direction of the market. Thus we can expect a continuation of the bearish movement over the next few days. I would not enter short on this pair right away, though. I would rather wait for a better price to enter at, like for instance a retracement to the 20 EMA on either the daily or 4-hour chart.
We can say the same of the USD/JPY with its impressive bearish day on Friday. Volume was far above average, and the move down very aggressive. However, a better short entry might be achieved by applying some patience. Look at the chart below:
USD/JPY Daily Chart
Perhaps we might see limited market volatility today, except for the AUD/USD perhaps. Later this week we have very important news events on the docket which might absorb the majority of the market’s focus. On Thursday we have the Bank of England’s interest rate decision, with the BOE governor Mark Carney speaking afterwards. There are also inflation numbers to be released, as well as MPC meeting minutes. Then, on Friday we have the much anticipated US non-farm payrolls release which could cause great volatility.
Good luck trading!