Australian currency traders sometimes refer to the local currency as “the little Aussie battler”. This is a compliment. As Aussies know, a “battler” is an average person who works hard to improve their lot despite outrageous fortune, while maintaining a cheerful and optimistic outlook. However, times are looking tough for the AUD.
The Federal government has just issued its annual budget. While increasing overall spending, it re-directs funds away from individuals towards productive investment. It is viewed as a fiscal tightening, at least in the short term. This may mean a longer period of “sustained interest rate stability” from the RBA, and along with an ongoing decline in Australia’s terms of trade is contributing to AUD selling.
The case for a stronger USD is well established, if somewhat over anticipated. Looking at both sides of the pair, there is a fundamental argument for a lower AUD/USD. The technical picture offers a potential trade set up:
This week, AUD/USD broke the up-trend in place since mid-January. The MACD crossed, and the widening gap suggests increasing selling momentum. A breach of support at 0.9200 is likely an indicator of a new downtrend, and a useful line in the sand for traders.
I’ll place a sell order (a stop entry order) at 0.9190, with a stop loss at 0.9228. The 61.8% retracement of the 2014 up move is around 0.8965 – my target. This gives a reward to risk ratio in pips of 125:38, or better than 3:1, suitable for my trading plan:
Note the boundary settings. The downward pointing arrow to the left of "Stop Entry" indicates the order will be triggered by the sell price hitting 0.9190. I've given this trade a boundary price of 0.9187 as I want to be sure of trading should the failing support produce a sharp move.
