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Day one: our AUD/USD trade

Potential sell strategy: sell AUD/USD on a daily close below 0.9428, stop loss at 0.9530, target of 0.9225.

After printing a bearish reversal on October 23, the pair has pulled back over 300 pips as the USD found strong buyers across the G10 space. The 38.2% retracement of the August to October rally comes in at 0.9428 and a closing break of this level could see 0.9223 come into play, ahead of the 100-day moving average at 0.9258.

I prefer to wait for a daily close below this important retracement to confirm the bears are in control and let momentum take the pair towards my target.

Strong support should be seen at 0.9357, being the lower band (two standard deviations) on the Bollinger band.

The daily MACD is still above zero; however it is headed sharply lower and should break below this level in the coming days.

The proposed stop on the trade comes in at 0.9530, just above the October 31 high.

Fundamentally the USD is getting more upside traction given the more hawkish FOMC statement last week and the failure by the Fed to talk down a near-term tapering exercise.

On Friday we heard from James Bullard and Charles Plosser who detailed that the Fed should keep their options open at every meeting. That puts this week’s US payrolls report (expected to show 125,000 jobs created) in play, despite the data print being heavily affected by the recent shutdown. Core PCE (private consumable expenditures) – the Feds preferred inflation read is also due and the market expects a rebound in inflation on the quarter from 0.6% to 1.5%. As things stand I feel the Fed could announce a cutting in the pace of its bond buying program in January, although March is still a strong possibility and the market consensus.

In Australia we get retail sales today (expected to increase 0.4% in September), while tomorrow’s RBA rates statement will also be interesting. We also get employment data on Thursday and the market expects 10,000 jobs to be created, while the unemployment rate should tick up to 5.7%.

Given Glenn Stevens recent dovish speech, the RBA statement will be interesting and increased narrative of wanting to see a lower AUD could be good for this trade idea.

It is worth keeping an eye on China, with its trade balance due for release on Friday. A weak export print could have implications on the market’s growth forecasts. We also get CPI data on Saturday and while the market expects inflation to increase to 3.3%, a number that is hotter than this could put downside pressure on the AUD (given that it would increase the market’s view on the PBOC becoming more aggressive with tightening).

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