Dismal stuff happening on the forex dance floor, eh? Have you been catching any new trends? I haven’t… The range seems to continue in most currency pairs -Well with the exception of the Canadian dollar who has been getting overly excited about higher oil prices, but we can’t guarantee that will continue – so with the NFP numbers already out and the Australia’s rates kept unchanged, I think we are due for a full Diamond Analysis on the Aussie – Dollar (AUD/USD) pair including technical, fundamental and sentiment stuff.
Economic Points
US Side
1- September employment results were not good
The September Non-Farm Payrolls (NFP) report turned out to be a huge letdown. The U.S. economy added only 142,000 jobs in September, way below the estimated 201,000 increase in employment and the average monthly hiring gains in the past 18 months. To make things worse, previous NFP reports suffered downgrades amounting to 59,000 in negative revisions.
Average hourly earnings were reduced to 0.0% versus last month’s 0.4% which means wage growth was virtually non-existence during the month of September. Furthermore, labor force participation slumped from 62.6% to 62.4% – its lowest level in nearly four decades. This suggests that more Americans probably exited the labor force and have given up on their job hunt.
But then again, this was only one job report out of 12 for this year and on average 2015 employment situation has been better than that of 2014 so far.
The dollar bulls seem to have given up on Ms. USA today though, as the US trade balance ALSO came in red… Poor Ms. USA can’t get a break!
2- Inflation goals are not reached
In an interview with CNBC, former Fed Chairman Ben Bernanke said the Fed has a 2 percent inflation target and It needs to get inflation up to that target.
An interesting point about inflation is that In the long term, low or no inflation has risks. Bernanke warned “If inflation is so very, very low that it’s close to deflation, the risk is that ordinary interest rates will be low all the time. … What happens where there’s a recession, there’s no where to cut.” We tend to agree with that.
So there you have it, inflation is so low and full employment is only starting to emerge. What does it mean for the highly anticipated interest rates? Meet me at point #3
3- Chances of a 2015 rate hike are pretty low
Zero percent chance for the month of October and 30% chance for a December interest rate hike to talk numbers. The U.S. still has two employment reports up for release before the end of the year so if the labor market is able to make a solid comeback for October and November, an interest rate hike for 2015 might still be in the cards.
With the employment outcome, we are pretty impressed with the Fed’s judgement not to raise rates in September because it would have probably just killed the economy. Growth has certainly been slower around the world, but the U.S. economy has been doing better than others, evidence the Fed’s monetary policy since the financial crisis has been correct.
So we are going to be all ears this Thursday as the FOMC minutes release before the closing bell of New York forex trading session. The important thing to remember is that these minutes might be a little on the optimistic end since policymakers heard the disappointing September NFP numbers at the time of the meeting. So make sure not to judge the minutes to quickly and go bullish Ms. USA the second the minutes are released!
Aussie Side
It’s no secret that Mr. Aussie (aka Australian Dollar) has been feeling low with the Land Down Under facing potential gloomier days ahead due to Chinese slowdown concerns. However, Australian central bank officials seem inclined to wait for more data before deciding to pull the easing trigger.
Reserve Bank of Australia (RBA) Governor Glenn Stevens and his mates chose to leave rates unchanged on Tuesday’s Sydney session, despite the economy being hit hard by the commodity slump. The RBA probably judged that the way the Aussie Dollar has been performing was enough stimulus for exports for the time being.
However, Mr. Aussie having a bit of a sense of humor and all, had a significant rally overnight on the news that rates won’t be cut, which is to be expected but not ideal if the country’s dependency is on a weaker currency.
Fundamental Summary
Mr. Aussie is hearing relatively better news than Ms. USA this week so chances are we could see a bit more of a rally in the AUD/USD pair. This brings us to Technical Analysis to determine how high Mr. Aussie can fly.
Technical Analysis
The AUD/USD pair could be in the process of forming a Double Top chart pattern as it seems they are heading towards the resistance level of 0.71 once again. A failure to break above this level could be our first clue for the chart pattern, with a break below the neckline at 0.6985 the final confirmation, shifting our outlook to bearish with 0.67 as first bearish target.
Alternative scenario is a super strong Mr. Aussie combined more disappointment pouring on Ms. USA, leading the pair to break above the resistance and Ichimoku cloud (the combo is important for the bullish strategy.) In that case, bullish targets are set at Fibonacci retracement levels at 0.7390 and 0.7535 in extension.
Trading Strategy
Wait for a break (or lack of break) of 0.72. Make sure you set your stop loss in order in case the market goes against you, and ALWAYS remember to set it a bit loose to avoid getting kicked out prematurely.
Here are the recommended supports and resistance levels* for both strategies:
| Support Levels | Turning Point | Resistance Levels |
|---|---|---|
| 0.67 | 0.72 | 0.7535 |
| 0.65 | 0.6985 | 0.7390 |
*Important Note: The support and resistance levels are not suitable for all traders and largely depend on your account size, margin and leverage. Book a private lesson to learn how to personalize your account based on our trading guide.
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