Currencies | Jul 05 2011
By Christopher Vecchio, Junior Currency Analyst
Since the announcement of quantitative easing round two, pegged at the end of August upon the completion of the Jackson Hole summit of the Federal Reserve, the Aussie-Dollar pair has been one of the strongest performing major currency pairs. In fact, the Aussie has appreciated over 18 percent against the Greenback since September 1, 2010. Now, that quantitative easing has ended and the Federal Reserve seeks to unwind its expanded balance sheet gradually over the coming months, the AUD/USD pair, trading in the middle of ten-month ascending channel, could face some strong headwinds, providing an opportunity for traders to take advantage of sharp moves in favor of the U.S. Dollar.
The chart below shows the Fibonacci extension and how the AUD/USD pair trade could unfold over the coming days, off of the March 17 Low at 0.9702, the May 2 High at 1.1011 and the extension to the June 27 Low at 1.0390.
Trading Tip – The AUD/USD continues to surge higher off of its June Low set last Monday at 1.0389, trading nearly 400-pips higher. On Friday I wrote, “While the daily technical indicators point towards further gains before a potential pullback, with the daily RSI climbing, now at 61, and the Slow Stochastic oscillator recently reaching overbought levels, the shorter-term 6-hour indicators suggest that a top may be forming and a pivot could occur soon. Thus, I’m willing to let the AUD/USD pair run higher before testing its 50-DMA at 1.0665 before entering a short position.” It appears the pivot has started to occur, with the daily RSI falling back to 57. On the other hand, the 6-hour indicators are already signaling a pullback in the pair, with the RSI falling to 60. The MACD Histogram is nearing parity, with the differential at +5 today from +33 on Thursday. The Slow Stochastic oscillator also has issued a sell signal, with the %K less than the %D, at 80 and 85, respectively.
Event Risk for Australia and the United States
There are three exceptionally important data releases from Australia and the United States this week, with labor market data due for both countries and a rate decision for the antipodean nation’s central bank. Coupled with the fact that this week marks the first week without quantitative easing since November, the first full week of July could be particularly volatile for the AUD/USD pair.
Australia – There are two events in focus next week for Australia this week, with the Reserve Bank of Australia rate decision on Tuesday and employment data due on Thursday. The RBA is not expected to change their rates at their meeting, with the Overnight Index Swaps showing a -5.0 percent chance of a 25.0-basis point rate hike; this means there is a slight 5.0 percent chance of a 25.0-basis point rate cut. Similarly, only 2.0-basis points are priced into the Aussie over the next 12-months.
United States – Data is light this week out of the United States, with only a handful of significant data releases due before Friday. However, on Friday the ever-important nonfarm payrolls data is due, expected to show a slight increase in employed labor market participants in June. May’s data was particularly disappointing following the ADP employment data released two days prior, so Wednesday could be the most volatile day of trading for Dollar-based pairs.
The views expressed are not FNArena's (see our disclaimer).
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Technical limitations
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