Last week, the Australian dollar (NYSEARCA:FXA) took a rest from its longest post-recession sell-off (3+ months and running). Good economic numbers with surging GDP and surprisingly strong job creation forced traders to pause and take note. The resulting relief rally took the Australian dollar quickly to my relief rally target around parity and the 50-day moving average (DMA).
Sell-off in the Australian dollar takes a pause
During three of the last six trading days, the Australian dollar has hit parity against the U.S. dollar only to turn back. With the 50DMA still defining the prevailing downtrend and now hovering directly over parity, it seems to me the next big move in the currency is imminent. The chart below summarizes the recent trading action.
Parity holding as resistance as 50DMA quickly declines into parity level
While I expect the downtrend to remain intact, I am on alert for a bullish breakout. As I have mentioned before, I am not expecting the Reserve Bank of Australia to continue cutting rates without some fresh macro-economic shock to force its hand. Assuming the market comes around to my line of thinking, downside should be limited to somewhere around the recent lows - meaning the overall short-term sell-off is coming to an end. We can see the change in fortunes in the Australian dollar's ability to trade well against the British pound (GBP/AUD) over the last three weeks. This growing strength is not what I would expect in a truly risk-off trading environment (of course, this may also speak volumes about the overall bearish conditions for the pound).
The Australian dollar is coming back against the British pound
Source for charts: FreeStockCharts.com
For now, I have already switched from a net long to a net short bias on the Australian dollar. I am expecting the relief rally to end here and the downward trend to reassert itself. (Technically oriented traders should also note that stochastics on the AUD/USD are very overbought now.) Given I also expect recent lows to hold over the short-term, I am reducing the aggressiveness of my trades with the Australian dollar…at least until some fresh catalyst appears.
Be careful out there!
Disclosure: Net short Australian dollar in forex.