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The reasoning behind the move has been largely down to the very low volatility seen in global markets. This has encouraged traders to reach out for yield and, specifically with the Australian bond market offering a higher yield relative to other countries, this makes the AUD attractive. For this investment theme to change, we need to see implied market volatility increase.
One could look at the Volatility index or AUD/USD five-day Average True Range (ATR) to get a read on volatility.
Event risk for the new week
Looking out to the coming week, the big Australian economic report will be the July employment report on Thursday, with the August RBA meeting minutes on Tuesday also likely to garner attention. Economists are expecting the unemployment rate to remain at 5.8%, with 5,800 net jobs expected to have been created in July. The markets are currently pricing a further rate cut from the Reserve Bank of Australia by year end at 49%, so these pieces of economic data will be watched by traders, although the Australia Q3 CPI print (released 26 October) is once again absolutely key.
On the US data front, we get retail sales and inflation data, although I would be listening out for commentary from New York Fed president Bill Dudley (speaks at 00:00 AEST on Friday) for clues around the future tightening from the Fed.
Looking at AUD/USD from a technical perspective and focusing on the weekly chart, there is scope for a move into the 2013 downtrend of $0.7960 over the medium term. This is where I would have far stronger conviction to look at short positions. On the daily chart we are seeing price supported into the five-day moving average and a break here could take the pair into the May uptrend of $0.7560. The obvious near-term upside target is $0.7800 and the April highs, where a closing break of $0.7800 would be significant.
In the short term, I would focus on the selling the weakest currency around and therefore I would also be selling GBP/AUD strength, as well as GBP/CHF around current levels of CHF1.2644 for a move to CHF1.2300. I would look to place a stop loss on the trade at CHF1.2855.