We’ve also seen the pair break closely above and subsequently re-test the neckline of the head and shoulders pattern of 0.9168 and rally nicely above the 93 handle. There are signs of consolidation as the pair tests the June and July highs between 0.9319 and 0.9345, and with daily oscillators looking very elevated, profit taking can’t be ruled out. A pullback would certainly be healthy given the short-term overbought nature of the pair, but we’d expect this to provide the bulls with new entry levels to initiate long positions. A close above supply at 0.9345 in the short-term would see the pair heading to the head and shoulders target of 0.9600. Fundamentally we feel a move above 0.9500 would be quite painful for the RBA and we’d expect the central bank to ramp up their AUD negative rhetoric on moves above here.
AUD/NZD has reacted strongly this morning to the RBNZ decision, with the pair hitting a low 1.1469, which coincides with the prior downtrend drawn from the March highs. After a 4% move from the July lows of 1.1200, the pair saw strong indecision from traders above 1.1600 and has since reversed. Fundamentally we like the pair down to 1.1300 again, given the 4.07% real yield (i.e. the NZ ten-year bond adjusted to current inflation rates) on offer; the highest by some way in the G10 region. The prospect of being the first central bank in the G10 to hike rates is real, despite hikes being largely priced in. We would look for a break of the prior trend, with the market adding to shorts on these developments.
AUD/JPY has traded just shy of the double bottom target at 93.80 and seems to be consolidating just below the 38.2% retracement of the April to August sell-off at 93.68. Fundamentally the pair has been assisted by a calming of emerging market outflows, Chinese and developed market growth and traders have been picking up carry by buying the high yielding AUD and funding the trade by selling the JPY. The pair looks significantly overbought on a number of metrics, however this is a sign of the strong short-term trend and therefore we’d expect pullbacks to be relatively well contained.
We highlighted downside risks to EUR/AUD last week and still think the pair will trade lower over the medium term. Short-term though the thematic of the AUD being overbought is true here and thus we feel the risk of short covering is high. We still feel the risk is that, over time, the pair will trade to the 38.2% retracement of the multi month rally around 1.3960.