Aussie signals downtrend on rise in unemployment rate

On the basis of a decline in the private capital expenditure and record high inventories of iron ore at the Chinese ports, on February 27th , we had cautioned traders about the possibility of an Aussie sell off.

In this regard, we had recommended Forex traders to go short in the AUD/USD pair near 0.7680, with a 100-150 pip profit target. Similarly, we had suggested binary traders to lock their surplus cash in a put option contract.

Both the recommendations ended in profit as the currency pair moved down as forecasted.

Backed by an increase in the price of iron ore to over $90 per ton, the AUD/USD pair climbed back to 0.7720 levels again on Wednesday. However, we expect the reversal to be short-lived due to the reasons given below.

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Yesterday, the Australian Bureau of Statistics reported that the economy lost 6,400 jobs in February, compared to an addition of 13,500 jobs in the previous month. The figures were a far cry from analysts’ expectations of 16,300 job additions. Including these job losses, the unemployment rate increased to 5.9% at the end of February, from 5.7% in the earlier month. The reported unemployment rate was also below the market’s unemployment rate expectation of 5.7%.

In the meanwhile, the Melbourne Institute stated that it anticipates a decline in inflation to 4% in March, from 4.1% in February. The inflation expectations reached a three year high of 4.3% in January this year.

Aided by a record low unemployment rate and strong economic growth, the US Fed announced a 25 basis point rate hike on Wednesday. It was the second rate hike in the past three months. With this hike, the benchmark rate hike increased to a range of 75 to 100 basis points. The US Fed also reaffirmed its intention to hike rates by 50 basis points, albeit in two 25 point slabs, in the current year. Additionally, the Fed also stated that it would consider three rate hikes in 2018 as well. While announcing a positive economic outlook, the policy makers cautioned that the inflation rate is near the target level of 2%. In the past three months, on an average, the US economy added 209,000 jobs per month. It is well above the 75,000 to 100,000 jobs required to keep in pace with the increase in the working-age population. Thus, considering the Fed’s rate hike and economic outlook, we anticipate the AUD/USD to decline in the days ahead.

The charts indicate the existence of a major resistance at 0.7720. The RSI oscillator is in the overbought region. So, there exists a greater downside risk for the AUD/USD pair.

In the Forex market, a sell order can be placed near 0.7720, with a stop loss order above 0.7820. The short position can be covered near 0.7610.

In the binary market, considering the probable downtrend, a put option can be bought from a reputed binary broker of choice. It is also advisable to select a seven day expiry period, and enter the trade when the currency pair exchanges hands near 0.7720.