Aussie signals bearish reversal on poor economic data

Very few traders and analysts would have expected the Aussie to strengthen against the US dollar in the past three months. There was not even a single positive report about iron ore, which contributes the most of export revenue for Australia. However, the AUDUSD currency pair strengthened from 0.68262 to 0.77217. Does this offer an opportunity to go short or long? A clear assessment of the trend can be made only after looking into the fundamental and technical aspects of the currency pair.

All major currencies, except Pound, have appreciated against the US dollar in 2016. Even though Aussie did not have any fundamental backing to strengthen, it was still carried away by the market force along with other currencies. The US dollar weakened against the major currencies because of the increase in reluctance from the Fed to raise the interest rates.

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Secondly, the RBA (Reserve Bank of Australia) is not in a hurry to go for another rate cut. The Central bank is actually waiting for the Fed to increase the rates so that it would automatically weaken the Australian dollar. This would give more leverage to RBA to intervene, if really necessary. Furthermore, the Central bank knows for sure that the market would soon bring the exchange rate in line with the fundamentals. This would make the AUDUSD currency go down without any effort from the Central bank.

According to McKinsey, the price of iron ore is expected to stay between $45 and $50 for the rest of the year. Thus, Australia will not realize any increase in revenue from iron ore exports.

The economic data from Australia is not encouraging as well. The home loans in February increased 1.5%, but were still short of analysts’ estimates of 2.1%. Similarly, the retail sales in February remain unchanged from the previous month. The analysts’ expectations were an increase of 0.4%.

Contrary to expectation, the trade balance declined to -3.41 billion. The estimates of analysts’ were $-2.55 billion. Thus, fundamentally, the AUDUSD pair is expected to dip in the days ahead.

Technically, the chart shows a resistance zone between 0.7739 and 0.7849. On the downside, major support exists at 0.7202. As it can be seen very clearly in the sub-chart, the momentum is declining. Momentum, being a leading indicator, moves ahead of the price. Thus, we can expect the price to decline very soon.

So, a forex trader should go short near the resistance zone with a stop loss order above 0.7849. The profit should be booked at 0.7350 levels. Looking for a forex broker in Australia, read our list of the best brokers available to Australian traders.

A binary options trader should purchase a one touch put option contract with expiry in the second week of May. The strike price for the one touch put option contract should be 0.7450 or higher.