A Change of Tone in AUD

AUDUSD Daily 080814

Good Morning (EST), Friends, and Happy Friday. It has been great to get some volatility and two-way action back into the equity markets, and there have been pockets of interest in currencies. There was some news out of Asia overnight; China, which has the ability to move currencies with its economic reports, released balance of trade figures. The trade surplus for July was $43.7 billion, with exports up 14.5% year on year, while imports grew 7%. That is pretty bad news for the Australian Dollar (AUD), since China is an important destination for Australia’s natural resources exports. If China is exporting more, but importing relatively less, that’s good news for China, but it’s less positive for Australia.

AUDUSD Hourly 080814

In addition, the Reserve Bank of Australia, the local central bank, revised its economic outlook; it now expects GDP growth from now until June 2015 of 2-3%, down from the previous 2.25-3.25%. It indicated that it expects unemployment to remain high, and complained that AUD “remains elevated”. The foreign exchange market can, of course, take a hint, and with many longer term investors, as well as traders, long AUD due relatively high Australian interest rates, charts are indicating that the downside may be the easier path. The Bank of Japan, meanwhile, kept rates and policy unchanged, which didn’t help those long of AUD/JPY, a popular carry trade.

Both the daily and hourly charts of AUD/USD suggest that a short entry taken around the 0.9290 – 0.9300 level offers a good ratio of risk to potential reward. If the downtrend is to have any legs, the pair should remain below 0.9325. while a retest of the low would be expected.

AUDJPY Daily 080814

AUD/JPY is in a more pronounced downtrend on the daily chart, and a short entry around 0.9520, with a stop above 0.9550, looks reasonable. The hourly chart below, however, indicates that might be a little ambitious; starting around 0.9490, looking to add if and when the retracement takes it back as far as 0.9520, will make getting involved more likely. While it isn’t as bad as losing money, missing a move because the entry wasn’t placed properly is, as I can attest, pretty annoying.

AUDJPY Hourly 080814

It’s difficult for me to imagine that equity traders and investors will be looking too aggressively to get long ahead of a weekend that seems likely to offer some potentially negative news from the Middle East, although there may be some short covering in the early going. The market always offers surprises, though, even when our analysis is correct, so it’s important to remain flexible, take profits at appropriate times, and avoid large losses that take us out of the market. Both Todd and Doc offer a host of ways in their blog updates and (particularly) in their courses to help us achieve those complementary goals.

As always, best of luck, and have a great weekend!