AUD remains where exactly it was when we recommended shorts in it. The pair (AUDUSD) showed some rallies in the last weekend, but bearish streaks have resumed for now. Although the pair, in the September month, jumped from the lows of 0.6687 to the recent highs of 0.6894 level, stalled there but retains downside risks near term, 0.6740 vulnerable.
The recent rallies are owing only to the US-China trade developments, a bounce in iron ore prices and large resource company dividend payments.
Technically, as we have already emphasized in our recent post that AUDUSD minor trend has been sliding through sloping channel (refer daily chart). The pair is responding to our whims and fancies, it has tested channel support and bounced back but restrained below stiff resistance of 0.6865 levels.
Back-to-back bearish candles have been traced out, such as, shooting star, gravestone doji and hanging man patterns have occurred at this juncture (refer circular area). For now, bearish engulfing pattern below 21-DMA has occurred at 0.6750 level.
As a result, the steep slumps below DMAs have been observed as rightly predicted.
For now, as both leading oscillators (RSI & Stochastic curves) still show downward convergence to the prevailing price slumps that signal selling pressures, thus, more slumps likely up to next strong support zone at 0.6735 level, any breach below these levels might expose renewed bearish pressures upon bearish DMA and MACD crossovers that indicate downswings to prolong further.
On a broader perspective, the double top formation with breach below neckline has been extending the major downtrend of this pair and hit 10 and a half year lows at 0.6675 areas (refer monthly plotting), in the recent past, bearish engulfing candles followed by shooting star patterns plummet prices well below 7EMA again on this timeframe.
Bullish engulfing pattern attempts to bounce back but 21-EMA caps upswings, every attempts of upswings are restrained below 21-EMA levels. The major downtrend remains intact as both lagging indicators bearish bias.
Bearish pressure was amplified by the 12-month high in Australia’s unemployment rate, shifting market pricing towards an Oct RBA rate cut. Delivery of this cut and a likely ongoing easing bias should keep a lid on AUDUSD rallies multi-week. We also do not expect a major US-China trade breakthrough in Oct. But an overhang of spec short A$ positioning and our dovish FOMC view should limit the amount of time AUD spends under 0.6700.
Trade tips: On trading perspective, at spot reference: 0.6753 levels, bidding above bearish technical rationale, it is advisable to execute tunnel spread options strategy with upper strikes at 0.6780 and lower strikes at 0.6705 levels, thereby, one can fetch certain yields as long as the underlying spot FX keeps dipping but remains above lower strikes on the expiration.
Alternatively, on hedging grounds ahead of RBA’s monetary policy that is scheduled for the this week, we advocate shorting futures contracts of mid-month tenors as the underlying spot FX likely to target southwards below 0.66 levels in the medium run. Writers in a futures contract are expected to maintain margins in order to open and maintain a short futures position.
