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Australian Dollar to Face Further Headwinds With the Reserve Bank of Australia on Tap

Posted Sunday, December 4, 2016 by
Eric Furstenberg • 5 min read

There are quite a number of central bank interest rate decisions scheduled for this week. The first one on the docket is the Reserve Bank of Australia's decision, early on Tuesday at 03:30 GMT. The RBA is expected to keep their rate steady at 1.5%. The rate decision itself will probably not cause a lot of volatility, except if the RBA delivered a rate cut. The accompanying rate statement, however, could weigh heavily on the Australian dollar if the RBA strikes a dovish tone.The Aussie traded a bit lower in November, and it is likely to remain weak in December. Here is a weekly chart of the AUD/USD:

AUD/USD Weekly Chart

There is a definite bearish tilt on this pair. The slow stochastics indicator at the bottom of the screen also testifies of this weakness. The pullback in the last two weeks has brought the pair back into a zone which offers a good risk to reward ratio for short-sellers. The 20-week exponential moving average, which is about 70 pips above Friday’s close could possibly cap the price in the next few weeks. Here is a daily chart:

AUD/USD Daily Chart

I’ve suggested in recent articles to sell this pair in the region of the former resistance zone as marked on the chart above. This resistance zone is still holding, as well as the 20-day exponential moving average, and the 200-day moving average. These two moving averages together with this former support zone which acts as new resistance create a strong confluence of resistance elements which could be an important advantage to traders taking on the short side.

Traders who’d like to engage in new short positions on the AUD/USD can use a few different approaches. One of these would be to open a long-term trade which can be entered at the current market price (0.74529). A wide stop loss of about 200 pips and a take profit of about 600 pips can be used. The following chart explains the setup:

AUD/USD Weekly Chart

The position can be brought to breakeven as soon it has moved in your favor by 200 pips (the distance of the initial stop loss.

Another option would be to wait for an even larger retracement before entering. This offers the advantage of a greater profit target and a smaller stop loss. The disadvantage of attempting this is that the price might not reach your entry order and you could miss out on a trade. Here is an example:

AUD/USD Weekly Chart

Of course, there are many other ways to trade the AUD/USD. Long term trades don’t appeal to every trader, and there could possibly be immaculate opportunities on lower timeframes in the week(s) ahead.

The RBA rate decision and rate statement are not the only important events out of the region this week, however. The Australian third quarter GDP (Gross Domestic Product) numbers will be released on Wednesday at 00:30 GMT. A decline in these numbers is forecasted which could be a reflection of a slower Australian economy.

USD/CAD

The BOC (Bank of Canada) also have an interest rate decision this week on Wednesday at 15:00 GMT. The BOC are expected to keep their rate unchanged at 0.5 percent. The recent rise in the oil price will surely alleviate some of Canada's economic pressure. I doubt whether the BOC will deliver a surprise rate cut at this stage, especially with the recent rise in the oil price.

If the oil price continues to advance this week, the Canadian dollar could gain some more ground against the US dollar, especially if the dollar retraces more of its recent gains. Here is a daily chart of the USD/CAD:

USD/CAD Daily Chart

Here we can see that the pair has broken convincingly below the 20-day exponential moving average. The negative divergence on the slow stochastics indicator predicted the current price retracement. As you can see on the chart above, this indicator is falling sharply at the moment, and as long as this indicator is sloping downward, the USD/CAD exchange rate could remain negative.

Of course, I wouldn’t recommend selling this pair at the moment because that would be fighting the larger uptrend. Remember, the pair is trading above its 200-day moving average, and even on a weekly chart, the price is still supported by the 20-EMA. Let’s look at a weekly chart of the USD/CAD:

USD/CAD Weekly Chart

The slow stochastics indicator is still giving us an overbought reading. The price is still contained by the upward sloping channel. These factors, together with the support offered by the 20-week exponential moving average, should caution traders to only consider long positions at this stage. The current price is also at a former resistance level which could be an important new support zone. Look at the following chart:

USD/CAD Daily Chart

As you might know, the Canadian dollar and the oil price are highly correlated. The oil price has risen sharply following the recent agreement by some oil-producing countries to reduce or freeze oil production output in an attempt to raise the price of this commodity. Their plan has been successful so far with crude oil trading above $51 a barrel. Just how effective this production cut will be over the long run, is difficult to say. I doubt whether the oil price will keep trading higher for very long. If the oil price starts to consolidate sometime in the next few weeks, it could support the USD/CAD. If the US dollar regains traction at the same time, the USD/CAD could quickly move higher again.

EUR/USD

The Euro faces many fundamental obstacles at the moment. The Italian referendum, the Deutsche Bank troubles, and talks of a possible exit from the European Union by Netherland.

The EUR/USD has traded much lower since the US presidential elections. Look at this daily chart:

EUR/USD Daily Chart

The pair has pulled back to a level which could offer a good opportunity to sell it. The technicals and fundamentals suggest a further decline in the EUR/USD, and the pair could possibly reach parity in the next few weeks. At the moment the pound is relatively strong, and perhaps selling the Euro against the pound will yield better results than selling it against the US dollar.

On Monday the ECB president Mario Draghi will deliver a speech at 14:00 GMT. On Thursday the ECB have an interest rate decision at 12:45 GMT.

GBP/USD

The GBP/USD traded aggressively higher in the last few days. The possibility that the UK might be able to access the European single market after the Brexit (at a cost) has triggered much of this impulsive ascent. The British economy would benefit tremendously if it were to retain trading access to the Eurozone.

GBP/USD Daily Chart

Although the GBP/USD is approaching an important resistance zone, I would not bet on a reversal in this area. If we get some more good Brexit news for the UK soon, there could be a strong relief rally which will probably not respect nearby resistance levels like the one in the chart above.