Volatility attached to risk sentiment has picked up substantially over the past few weeks. For the high-yielding AUDUSD, the rise in uncertainty has led to a correction from its record breaking, long-term rally. Two weeks ago, the Australian dollar managed to push through resistance at 0.94 and in doing so set a new 23-year high. However, momentum quickly flagged after the pair met its next psychological level at 0.95.
A subsequent 350-point correction from this historical level unseated the consistency of a 1000-point rally and raised concern that the seven-year Aussie dollar bull run may finally be running out of steam. These concerns seem premature though. The AUDUSD’s most recent rally developed despite a deteriorating outlook for financial markets and global growth. Domestic growth is still very strong and demand from booming Asian trade partners promises to feed expansion. What’s more Australia’s central bank is the only one that is hawkish and still pursuing rate hike. Fundamentals and technicals all seem to point to parity for AUDUSD.
[I]To read more about the technical outlook for AUDUSD, read the Daily Technicals.[/I]
[B]Hedging Strategy of the Week[/B]
[B]Currency Pair[/B]: AUDUSD
[B]Long Term Bias[/B]: Bullish
[B]Long Term Position[/B]: Holding Long (from 1/22 swing low at 0.8510)
[B]Short Term Bias[/B]: Bearish
[B]Short Term Position[/B]: Short Against 0.9335 (falling trendline), Target Rising Trendline (0.9165 for 03/12)
While both technical and fundamental considerations point to AUDUSD’s ascent to 1.00, the market may be in for an extended period of congestion before the Aussie bulls reclaim direction. For those that are keeping with the long-term momentum of the dominate trend and already have an established long position or are looking for a good entry on bullish convictions; actively hedging AUDUSD through its recent consolidation can reduce drawdowns and boost profits. For those bulls already in the market, a short (hedging) position can be taken around 0.9335 to neutralize a short-term reversal in the pair’s closing wedge. A target of 0.92 (or modestly above the rising trend line) will cancel out the pullback; and a stop around 0.94 will leave the long side of the trade to take profit on an upside breakout.
[B]When should I use the hedging feature?[/B]
Markets hardly ever trade in the same direction for long. Though there are general trends that may unfold for weeks, months and years; there is almost always considerable fluctuation in price during these periods – sometimes leading to significant retracements. There are a few common strategies that traders use to immunize their risk to counter-trend moves while still holding to the long-term trend. One method of reacting to these changing tides is to actively enter and exit a trade on each swing, which requires constant attention and a superior ability to pick tops and bottoms. The other, more passive, strategy is to hold on for the long-term trend through retracements in the belief that the higher trend will reengage. Taking a temporary hedge positions through the counter-trend moves, on the other hand, requires less accuracy in picking tops and bottoms and at the same time lowers the drawdown while increasing the potential for return.
The hedging feature is currently available on all accounts using FXCM’s No Dealing Desk service.
For more information on FXCM hedging strategies please visit What Is A Hedge Ratio? - FXCM UK
[I]Written by: John Kicklighter, Currency Analyst for DailyFX.com
To contact John about this or other articles he has authored, you can email him at <[email protected]>. [/I]