Today’s Forex Guide

AUD/USD: up or down?


Aug.17.2015

10:00 AM (EST) Update

Month of August is not entirely known for wild trends and that's a major reason why we have been seeing consolidation among almost all major pairs from a long-term point of view. This has been a great opportunity for range traders but a bit boring for trend-traders. With a mostly empty economic calendar on Monday, let's take a look at Mr. Aussie who's having its Monetary Policy Meeting Minutes released on Tuesday as he dances against Ms. USA on the forex dance floor.

Economic Points

August Reserve Bank of Australia (RBA) monetary policy statement got Mr. Aussie excited upon its release because of two reasons:

1- In Australia, the available information suggests that the economy has continued to grow.

2- Governor Glenn Stevens conspicuously left out recently ubiquitous language saying further Aussie depreciation is “both likely and necessary”.

They policy makers of the Land Down Under kept cash rate unchanged at 2.0% and said that the global economy is expanding at a moderate pace, but some key commodity prices are much lower than a year ago. Much of this trend appears to reflect increased supply, including from Australia. Australia's terms of trade are falling nonetheless.

As far as jobs report goes, on the surface, Australia’s employment report for July was a bit confusing to many forex traders since the jobless rate climbed higher to 6.3% from the previous reading, which was revised higher from 6.0% to 6.1%, but employment change saw a net increase of 38.5K jobs (10.2K expected, 7.0K previous).

After digging more into the details however,  it looks like more working-age people are joining/re-joining the active work force because the labor force participation rate climbed higher by 0.3% to 65.1%, and  the Australian economy wasn’t able to absorb the new workers, which is why the jobless rate climbed higher even though employment change saw a net increase in jobs.

In the mean time, we had China devaluing its currency last week.. For new members of the Invest Diva community who are asking "What the heck does China has to do with Mr. Aussie?" let me explain that Australia and China are trading buddies. China's devaluation of Yuan meant letting other foreign currencies such as Mr. Aussie rise in value against the yuan, consequently weighing on export activity and price levels in those nations. In effect, China dumped its problems on the rest of the world. This explains why Asian currencies such as Mr. Aussie sold off sharply after the devaluation announcements.  However a new report from Reuters this morning says after the PBOC set the yuan slightly above its fixing rate on Friday, markets fears that Beijing was intent on a bigger devaluation soothed a tiny bit. That made both the USD and Aussie dollar stronger which explains the spinning top candlestick formation on the forex dance floor (view chart below)

Looking to this week, among the movers of Mr. Aussie on Monday's Asian session was the bearish pressure on Mr. Aussie which was most likely a reaction to reports that Goldman Sachs is forecasting a 30% drop in iron ore prices in the next 18 months due to expanding supply and contracting demand. Again for Invest Diva newbies who are wondering what iron ore prices have to do with Mr. Aussie, let me just say that Australia is a major exporter of iron ores, so lower iron ore prices would be bad for the Australian economy.

So all in all, we are getting a fair bit of mixed signals from the Land Down Under which could explain why it has been consolidating and failing to reach our bearish target. Now let's take a look at the matter from a Technical point of view.

Technical Points

We entered a bearish position on the AUD/USD pair right below the 23% Fibonacci at 0.7470 as the pair continued to dance below the Ichimoku cloud under a bearish pressure. However the bearish market sentiment softened before we reach our target of 0.7150. The pair is testing our patience, eh?! Still the moving averages suggest the down-trend isn't over yet and the markets in particular are looking at the Fed rate hike decision in September. We could see a bit more upside but with the pair remains within a falling channel with the pivot level set at 0.76. As long as the pair remains within the channel, we could keep our bearish outlook.

AUD/USD Daily
Taking a look at the monthly chart gives us more backup to the bearish strategy since the pair seems to have yet to complete a Saucer Top pattern, remains below the Ichimoku cloud in an overall downtrend, with support levels set at 0.7150 and 0.64.
AUD/USD Monthly

 

Supports and resistance levels:

Support Levels Turning Point Resistance Levels
0.7150 0.76 0.8025
0.64 0.78 0.82

*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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