Aussie turns bearish on weak Consumer Price Index data

Following the weak consumer price index (CPI) data, the Aussie declined against the Swiss Franc from a high of 0.75550 to a low of 0.74062 on Wednesday.

While the Aussie was expected to fall against most of the major currencies, considering the manner it strengthened without much of fundamental backing, the extent of fall surprised even the short-sellers.

In fact, many traders now believe that it would take a while for the Australian dollar to recover.

Last year, in spite of the harsh economic weather, the Australian economy registered a GDP growth of 3%. The business scenario was not overwhelmingly positive, but still moderate. The investment scenario remained upbeat. The unemployment rate had declined to 5.7% in March, from a high of 6.2% recorded last year.

JammyNews#HDN

So, the soft CPI data surprised markets to a greater extent. Yesterday, the Australian Bureau of Statistics stated that the CPI had fallen -0.2% for the last quarter. It was the first decline seen in the past seven years. The analysts’ expectation was a CPI reading of 0.3%. The CPI reading for the previous quarter was 0.4%. The decline in the price of petrol and food prices saw the inflation rise 1.3% over the past twelve months ended March, 2016. The analysts’ expected a 1.7% increase in the inflation rate.

The Reserve Bank of Australia’s trimmed mean CPI (y-o- y) was 1.7%, compared to an expectation of at least 2%. Even the service sector inflation has slowed down below 2%.

The yields on three year government paper dropped 12 basis points, the largest since last June. The decline in yield signals the possibility of a deeper rate cut by the RBA to ward off the risk of deflation. In fact, the RBA has suggested several times that low inflation may ultimately call for a rate cut. However, the RBA is still not convinced by the effectiveness of rate cuts in bringing back the economic momentum. The Fed, as expected, maintained the interest rates on Wednesday. Any further rise in the price of iron ore would strengthen the Aussie. It would also seriously affect the Australian economy from recovering. Thus, analysts believe that the RBA will have no other go but to announce rate cut as early as next week.

The chart indicates that a major support for the currency exists at 0.7240. The MACD has formed a negative divergence with the price. Furthermore, the MACD main line has gone below the signal line. Thus, technically, the stock is in a sell zone. A short position can be initiated at the prevailing price of 0.7450 with stop loss above 0.7650. The profit can be booked at 0.7200 levels.

In the same manner, a australian forex trader should consider purchasing a one touch put options contract with a target or strike price of about 0.7300. An expiry date falling at least one month from the date of purchase of the put options contract should be chosenfor increasing the probability of success in the trade.