Volatility is dying down for the broader currency market into the weekend and relatively light economic fair next week suggests we may see some stabilization going forward. These are good fundamental conditions; but given recent price action, many pairs have suffered major tails that have dulled technical ranges while others are threatening to develop new trends. Our AUDUSD strategy is certainly on the riskier-end of the spectrum; and should be considered only by those with a high tolerance for the unknown.
[B]Why Would AUDUSD Hold a Range?[/B]
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· [B][U]Levels to Watch:[/U][/B]
[B]-Range Top: 0.8460 (Range, Major Pivot)[/B]
[B]-Range Bottom: 0.7710 (Pivot, Fib)[/B]
· The week is ending and the last-gasp for event risk on either side of the AUDUSD will pass over soon. RBA Governor Steven’s semi-annual testimony could elicit straightforward comments on growth and policy forecasts while the [US CPI](http://www.dailyfx.com/story/bio1/EUR_USD__Trading_the_U_S__CPI_1250184299086.html) and consumer confidence data will weigh in on stability and pace of the US recovery. After these events though, we will see liquidity drain into the weekend and then look ahead to a relatively light period starting Monday.
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· The [bullish trend behind AUDUSD is clear](http://www.dailyfx.com/story/bio2/US_Dollar_Supported_by_Short_1250173655884.html). Since the market’s more risk-sensitive assets turned higher with underlying sentiment back in March, this comm-bloc pair has advanced at a surprisingly consistent clip. Though it is fighting the natural bias, there is a short-term range of highs near 0.8475 and a major pivot level at the even 0.85 figure.
[B][I]Suggested Strategy[/I][/B]
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· [B][U]Short[/U][/B][B]: One’s level of caution should dictate full or half-size entry orders at 0.8430.[/B]
· [B][U]Stop[/U][/B][B]: A stop needs to cover our recent range and the psychological level, so 0.8530 will do. To secure profit, move the stop on the second lot to breakeven when the first target hits.[/B]
· [B][U]Target[/U][/B][B]: The first objective equals risk (100) at 0.8330 and the second[/B][B] target is set to 0.7930. [/B]
[B]Trading Tip[/B] – Volatility is dying down for the broader currency market into the weekend and relatively light economic fair next week suggests we may see some stabilization going forward. These are good fundamental conditions; but given recent price action, many pairs have suffered major tails that have dulled technical ranges while others are threatening to develop new trends. Our AUDUSD strategy is certainly on the riskier-end of the spectrum; and should be considered only by those with a high tolerance for the unknown. Taking in price action for the year, it is rather clear that we have a strong, bullish bias on tap. However, this move is certainly the product of risk appetite and a battered US currency. Both trends have come to recent levels of exhaustion; yet that doesn’t mean they can’t reestablish themselves given one unforeseen event or shift in underlying sentiment. However, we are now retesting the highs from last week after a sharp two-day rally. End of the week exhaustion is a very real probability – especially with the long-term public pivot at 0.85. First target and stop account for a potential, tempering of this rally with a cut-out point that is above the highly visible resistance and initial objective that can be reached within a day’s price action or two. Since we trail the stop on the remaining position to breakeven after the first target is hit, we can freely speculate on a much more aggressive reversal without absorbing too much risk. We will remove all open orders before the market closes for the weekend.
[B]Event Risk for Australia and US[/B]
[B]Australia [/B]– Event risk for the Australian dollar has been relatively light over the past few days and looks to completely deflate over the coming week. The most threatening release for the period actually comes through the early Friday hours with RBA Governor Glenn Steven’s semi-annual testimony before Parliament. Coming off a decision to hold rates at the last meeting and increasingly hawkish commentary, the market will go into the event looking for forecasts to an economic recovery and time frame for returning to a hawkish rate regime. As this is a government examination, we are likely to see straightforward questions and expect the same from answers. On the other hand, as politicians are usually interested in facilitating, we could see calls to keep policy loose. Looking ahead to next week, there is of note; so we will once again take guidance from the ill-defined influences of risk appetite.
[B]US[/B] – With only one more session left for the week, we will still see a heavy round of event risk Friday. Among the notable indicators we have industrial production, the consumer inflation index and University of Michigan consumer sentiment gauge. This is a significant round of data for rate watchers and policy officials. With the Fed setting a time frame for its bond program, they will look at the balance for growth and inflation to determine how quickly they should move on turning their policy stance. Should we tip into deflation and consumers choose to take away from growth, the outlook will turn from recovery to fortifying growth and the money supply. Other, lesser indicators aside, the dollar is very near the extreme low of its yearly range; so bigger fundamental themes should be monitored.
[B]Data for August 14 – August 21[/B]
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[B]Data for August 14 – August 21[/B]
[B]Date (GMT)[/B]
[B]Australian Economic Data[/B]
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[B]Date (GMT)[/B]
[B]US Economic Data[/B]
Aug 13
RBA Governor’s Parliament Testimony
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Aug 14
CPI (JUL)
Aug 18
Westpac Leading Index (JUN)
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Aug 14
U. of Michigan Confidence (AUG P)
Aug 18
Treasury Secretary Speech
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Aug 18
Housing Starts (JUL)
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Aug 21
Existing Home Sales (JUL)
[I]Written by: John Kicklighter, Currency Strategist for DailyFX.com
Questions? Comments? Send them to John at <[email protected]>. [/I]