Given that it’s not taking a lot of good news to push the Australian dollar (AUD) up right now, it’s clearly too soon for forex traders to take a buy and hold position. What’s needed, argues Matt Simpson, market analyst at ThinkForex, is more positive data coming out of China – particularly growth to instill global market confidence – and for the markets to return to ‘risk on’ appetite.
Urging a ‘watch and wait’ stance, Simpson says it’s better to let the market show its hand before jumping in, hoping for any home runs. “Clearly the market would like to feel a lot more optimistic across the board about Australia and China before the outlook is more bullish going into the next few weeks,” says Simpson.
When all markets are moving in the same direction, as we saw last week when China’s PMI data came out, he says there’s a higher chance of a trend continuing.
“At present however, we are seeing discrepancies across the markets which results in choppy trading conditions, making directional trading very difficult,” says Simpson.
As expected, there was sufficient weakness in the Chinese PMI – which hit a seven month low – to push down the AUD enough for it to stay below US$0.90. The fact the AUD closed the week below US$0.90 is a victory for the bears which may entice further selling this week. However, a slight concern is a vulnerable looking USD which may make any immediate and lasting declines on the AUD difficult to time.
For this reason Simpson suggests a short-term trading horizon may be better suited to current trading conditions until a clearer picture emerges. A key level to watch is US$0.9080 as a break above here opens up US$0.9017 and US$0.9025 as bullish targets.
However, due to the bearish momentum of the decline, Simpson does not fancy the chances of this holding and fully expects to revise this channel in due course. “The recent gains appear corrective and we saw 800-plus pip retracement only last September before we continued to print fresh new lows,” says Simpson.
With the 21 week moving average still heading lower, Chris Weston IG’s chief market strategist agrees that the current rally does look corrective in nature and he’s expecting to see the AUD reach US$0.8500 by year’s end. “From a risk-reward perspective, good data is going to get a much bigger reaction – potentially 100 bps – than bad news – potentially 30 bps – when there’s a strong down trend,” says Weston. “But after a strong move in 2013 to the downside, the recent strong rally failed to reach key retracement levels at US$0.9097, and we see this as a negative or bearish signal.”
So despite the AUD experiencing increased business confidence and retail sales, Simpson says these factors alone are insufficient to change the overall course of his bearish bias, and maintains a bearish forecast on the long-term with primary targets at US$0.85 and US$0.80 respectively.
When sentiment is tracking so strongly, as we’re witnessing right now, Simpson says the great unknown for traders is how long they can stick with that trend going forward. Indeed, a bullish Pinbar (aka very strong reversal patterns) may suggest near-term strength, however upside may be limited and this should allow AUD/USD to push higher.
Due to his bearish bias on the higher timeframes, Simpson still sees a higher price towards US$0.92-93 as a gift for Aussie Bears and would be seeking longer-term bearish setups.
While the outlook remains decidedly neutral, Weston says with the market pricing-in a 12 bps increase, there’s clearly a positive overall bias. He expects both local and global markets to remain particularly sensitive to short-term drivers until there is a clearer outlook on inflation, which remains the key driver for 2014.
He expects the currency to remain in somewhat of a holding pattern, until there’s potential sea-changing evidence of monetary policy dynamics from central banks. While the market is pricing-in a moderate rate hike cycle, he says any drop in inflation and CAPEX numbers would be argument for the RBA to move from a neutral bias to modest easing bias. “If inflation forces were trending lower, the RBA could put an easing bias back on, so we’re going to see constantly changing dynamics until there’s a clear theme on inflation,” he says.
He says central bank divergence between the RBA and RBNZ has arguably thrown up some interesting movements between the AUD and the Kiwi (NZD). Following a very long term down-trend between March 2011 when it peaked at NZ$1.3795 to 20 January 2014 when it fell to NZ$1.0492, the AUD/NZD has finally reached a tipping point with short-term technicals looking more constructive.
While the RBA maintains its neutral bias, the RBNZ has moved beyond its previous emergency rate level – maintained following the GFC and subsequent Christchurch earthquakes – to price in an aggressive rate hike cycle. “Traders are looking to buy dips in pairs at NZ$1.0700 based on the fact that the market is pricing in five significant moves from the RBNZ,” says Weston.
Beyond the Kiwi, he says it’s important to keep looking for thematics that could impact Central Bank thinking. Based on favourable recovery signals in the UK, he expects the Bank of England (BOE) to be the first G10 economy to raise rates in 2015, which should find consistent support for sterling (GBP).
Similarly, he says if the poor performing Canadian economy improves, those who were positioned negatively would be forced to close out their trades and the net effect would be an improvement in the Canadian dollar.
When it comes to currency pairs, he expects the GBP/AUD, currently trading at A$1.85 to get up to A$2 by year’s end, while his year-end target is for the USD/JPY – one of the most interesting currency pairs – to go from 102JPY to 110JPY.
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