AUDUSD an uneasy equilibrium

For traders of G10 FX, the price action during July has been typical of this time of the year. We need to look no further than the AUDUSD dollar, which has a reputation of being one of the more volatile currency pairs, to get a sense of the hypnotically sleepy effect the Northern Hemisphere summer vacation season has had on FX markets.

After falling out of the long- term trend channel back in mid-April, the AUDUSD’s downtrend stalled and last week was the sixth week in a row the AUDUSD probed below .7400c only to recover and close the week back at .7400c. As the loss of momentum/reversal candles highlight on the weekly chart below, there has been good demand for the AUDUSD below .7400c.

The other notable factor is that the AUDUSD began to stabilise in mid-June, shrugging of a 6% decline in the Chinese currency the Yuan, as USDCNY exploded from around the 6.4200 area to above 6.8300. Generally, when the Yuan falls hard and fast as it has done, the AUD will also fall.

One possible explanation for the AUDUSD being supported is the rally in the price of iron ore from around U.S.$62.80 per tonne in early July, to approximately U.S.$67.85 as of today. A gain of approximately 8% which goes someway to explain the AUDUSD finding support on the downside as iron ore remains Australia’s largest export earner.

From a technical perspective it is unusual to see such clear evidence of buying activity in a market with little or no follow through to the upside and this suggests the buyers are being very particular about their buying levels, with little enthusiasm to chase the AUDUSD much above .7400c. This is illustrated by the AUDUSD faltering ahead of the .7460/80 resistance zone, which also includes the trend channel resistance from the .8135 high of January this year.

For now, we can conclude the AUDUSD is trading in an uneasy equilibrium between .7310 on the downside and .7480 on the topside. Personally, I would prefer to wait for a break and close outside of either of these levels before looking at a trade. Worth keeping in mind that if the AUDUSD breaks to the topside above .7480/7500, the speculative trend following market is already quite short the AUDUSD as reflected in the chart below. Hence a rally could go further than expected as the markets short positioning is unwound.

Source Tradingview. The figures stated are as of the 1st of August 2018.  Past performance is not a reliable indicator of future performance.  This report does not contain and is not to be taken as containing any financial product advice or financial product recommendation

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