AUDUSD Channel Looks to Temper Recent Momentum and Secure a Clear Range

This is the third range-based opportunity we have seen from the Australian crosses in so many days. AUDUSD has seen extraordinary momentum so far this week through a rebound in risk appetite. However, the fundamental drive is somewhat unstable – especially when technical resistance comes into view.

[B]Why Would AUDUSD Hold a Range?[/B] [B][/B]

         ·         [B][U]Levels to Watch:[/U][/B]

         [B]-Range Top:       0.8100 (Channel, Range, High)[/B]

         [B]-Range Bottom: 0.7700 (Channel, Fibs)[/B]

         

         ·         So far this week, we have seen an aggressive rebound in risk appetite. Equities, commodities and fixed income have all reaped the benefits of a recovery in optimism. However, the drive for this move was thin when it began. Now three days into the advance, a clear lack of market-wide event risk clearly lowers the probability of continuation. From here, 2Q earnings will be the most likely driver for underlying currents. 

         [B][/B]

         ·         The rally from AUDUSD this week could be considered an unfettered advance that could extend up to June’s eight-month high before bulls are put into check. However, before this swing high can be tested, there is a very clear, trend channel that must be dealt with. This boundary, along with a late-June reversal, makes for significant resistance. 

         

         [B][I]Suggested Strategy[/I][/B]

         [B][/B]

         ·         [B][U]Short:[/U] Half-size entry orders will be placed at 0.8075, which is purposely close to the channel.[/B][B][/B]

         ·         [B][U]Stop:[/U] An initial stop of 0.8175 is wide enough to cover the June 30th reversal high. To secure profit, move the stop on the second lot to breakeven when the first target hits.[/B][B][/B]

         ·         [B][U]Target:[/U] The first objective equals risk (100) at 0.7975 and the second target is set to 0.7875. [/B][B][/B]

                         [B]Trading Tip[/B][B] – This is the third range-based opportunity we have seen from the Australian crosses in so many days. AUDUSD has seen extraordinary momentum so far this week through a rebound in risk appetite. However, the fundamental drive is somewhat unstable – especially when technical resistance comes into view. Taking stock of the economic data that has crossed the wires over the past week, there was little that could catalyze such a move; and there is little over the coming week that can support continuation. Clearly, this was a move derived through general investor sentiment (a belief supported by the equally impressive recovery in equities and other risk-sensitive assets). To keep this rally going with greater levels of resistance coming into view, we would need a clear source of positive sentiment. There are few currents that could provide the necessary drive; but there is real risk in earnings surprises forcing a new trend. To account for this, our strategy looks for an aggressive entry that is close the channel extreme and a stop that is wide enough to cover the last major swing high. To reduce risk, we have halved position size. We will cancel any open orders before the week ends. [/B][B]

Event Risk for Australia and US

[/B][B]Australia[/B] – The Australian dollar is first and foremost tied to its sentiment. Relatively strong growth, a high benchmark lending rate and heavy exposure to commodities makes this a speculative favorite. For general risk appetite, no gauge is better to reflect investor optimism than equities. Though the market is more congestive than trending; the general bias has clearly taken a disappointing shift. For specific event risk, the Aussie docket holds a few notable market-worthy events over the coming week; but they are few and due after the weekend. Inflation will be a clear theme. Producer and consumer-level inflation reports for the second quarter will reveal the pressure on the RBA. If price growth is restrained, it will allow policy makers to focus on growth and financial stability when making policy decisions. On the other hand, should inflation pick back up or deflation develop, rate decisions will become far more difficult to deliberate. The RBA’s minutes will further show what the central bankers are monitoring and concerned about.

[B]US [/B]– For the dollar’s part, this past week’s primary fundamental driver has been investor sentiment. Without the desperate need for liquidity, the concept of safe haven has changed. For the dollar, the ballooning budget deficits and unstable economic recovery (though the US recovery looks to be more certain and steady than most of its major counterparts) have eroded its role as a safety currency. Earnings season state-side promises to be a significant market driver owing to its contributions to growth forecasts and the health of financial markets. Bank and financial firms’ numbers will be particularly influential in this sense; and many big names are due to report on Thursday and Friday. As for the economic calendar, data is otherwise reserved. For the remainder of this week, only the housing starts figure shows promise as a leading report for the later released existing and new home sales data as well as the sector’s inflation gauge.

[I]Questions? Comments? Send them to John at .[/I]