Aussie signals downtrend on decline in consumer prices

The AUD/USD rally, which began in the last week of December 2016, took the pair to a high of 0.7608 on Tuesday this week. This translates to a gain of nearly 450 pips since December 26th .

Most of these gains were a direct result of Trump’s comment calling the Greenback “too strong” and lack of clarity regarding the promised infrastructure spending in the US.

The market also brushed aside the third quarter economic contraction of Australia as economists portrayed it as a one-time event.

However, the recent economic data, commodity prices, and interest rate scenario indicate that the AUD/USD rally is about to end in the near future.

ARIRANG NEWS

Yesterday, the Australian Bureau of Statistics reported a decline in the consumer prices in the quarter ended December. According to the institution, the consumer price inflation decreased 0.5% q-o-q, compared with a gain of 0.7% in the prior quarter. Analysts had expected the economy to record a 0.7% rise in the CPI reading.

According to the Reserve Bank of Australia, excluding the most volatile 30% of the items, the CPI reading declined 0.4% q-o-q in December. The market had anticipated a 0.4% increase in the trimmed CPI reading.

Coking coal, which hit a high of $308 per ton in October, declined to a low of $172.6 earlier this month. In January 2017 alone, the commodity has lost about 23% of its value. Coking coal, a raw material used by steel manufacturers, is the second major export revenue earner of Australia. The decline is expected to affect the trade balance of Australia. Considering the headwinds faced by the Australian economy, Shane Oliver of AMP anticipates the RBA (Reserve Bank of Australia) to announce rate cut in May.

As far as the US is concerned, the market is expecting the FED to announce another rate hike soon, considering the inflationary policies of Trump. The US economy is now functioning at full employment (unemployment of 4.7%). This supports the view of analysts calling for an earlier rate hike. The market has so far priced only two rate hikes and the US dollar rally is yet to see its peak. So, fundamentally, we expect the AUD/USD pair to drift downwards.

The AUD/USD pair faces heavy resistance at 0.7610. After hitting a peak reading of about 205, the CCI (commodity channel index) indicator has fallen below 100. This indicates a lack of enthusiasm among buyers to enter at the current levels. Thus, we can anticipate the AUD/USD pair to decline further.

A currency trader can open a short position near 0.7600 levels to profit from the analysis. To keep losses to a minimum, a stop loss order should be compulsorily placed above 0.7680. The short position can be covered when the price falls to about 0.7450. Considerable profit can be pocketed by investing in a low or below contract offered by a reputed forex broker. Care should be taken to make the investment when the currency pair trades above 0.7580. Likewise, an expiry date in the first week of February should be selected.