The Fed is attempting to negotiate persistently high inflation, a full-scale war in Europe, sanctions, price shocks in commodities, COVID, supply chains, and trade uncertainties on de-globalization and de-carbonization.
Historically in a normal fed rate hike cycle, the U.S dollar falls by approximately 3.5-4% in the six months post the first Federal Reserve rate hike. Just 48 hours after last week’s FOMC meeting, material U.S dollar weakness was evident across various currency pairs.
USDSEK finished the week 4.5% below where it was pre the FOMC meeting. At the same time, the AUDUSD rallied over 2% to cement its first close above .7400c in 19 weeks.
However, the recovery in the AUDUSD has not just been a U.S dollar story. Last week Australia's Terms of Trade recently surpassed the Global Financial Crisis peak to trade at a record high, boosted by elevated commodity prices.
The favourable Terms of Trade shock one of the reasons behind our long AUDUSD trade idea when we suggested to buy “weakness in the AUDUSD into the .7180/.7170 support region with a stop loss placed below .6975. The target would be the .7555 high from October 2021.”
The AUDUSD has since made good initial progress to the .7555 profit target aided by short-covering from the trend following community who have held near-record levels of AUDUSD shorts since October.
According to the latest IMM update for the week ending March 15th, the trend following community cut almost 33k contracts. However, they remain short 44k AUDUSD contracts.
As can be viewed on the chart below, the AUDUSD is now testing resistance .7425/45 coming from the trendline from off the February 2021 .8006 high and the early March .7441 high.
A break/close above .7425/45 would see the AUDUSD extend its rally towards the .7555 profit target. To protect against possible AUDUSD upside failure, we advise lifting the stop loss from .6975 to just below the 200 day moving average at .7280.
Source Tradingview. The figures stated areas of March 21st, 2022. 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