Watching AUD/USD

After a 0.7% increase on the quarter in Australian core inflation we saw a good pop in AUD/USD taking the pair to $0.8025, which is the 38.2% retracement of the recent sell-off.

US Dollar
Source: Bloomberg

Good sellers have been found around this key retracement and I would advocate short positions into $0.7938, although the risk is the pair doesn’t trade here. I would keep position sizing small, potentially adding if the pair broke below the 25 January low of $0.7858. I would look to protect the position in case my analysis is incorrect by placing a stop loss on the trade at $0.8140.

Certainly the core inflation print subtracts from the idea that the Reserve Bank of Australia will cut interest rates in February. However, this doesn’t seem to be the view from Terry Mccrann. Writing in the Herald Sun Mr. Mccrann suggested that the RBA will ‘almost certainly’ cut interest rates next Tuesday. His view seems to be the catalyst for AUD/USD selling, with offshore funds heavily influenced by his bias.

Had the Federal Reserve portrayed a greater urgency around lifting the funds rate overnight we could have seen AUD/USD already through the lows. However, the US central bank have given a sobering view on inflation expectations, in turn causing strong buying of US treasuries and pushing the USD lower.

Looking at the various oscillators both the RSI and stochastic momentum, both suggest the pair is oversold. However, I think it highlights the strength of the selling and therefore throws weight behind my directional bias.


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