Buy AUD/USD ahead of Rates Disappointment

Interest rate markets today are pricing a 65% chance that the RBA will cut from official rates next Tuesday. Global events ahead and stronger Australian house prices, combined with bullish chart behaviour, make a case to buy AUD/USD ahead of disappointment next Tuesday.

Higher interest rates support currencies, lower rates do not. Some traders have sold AUD/USD ahead of next week’s RBA announcement, anticipating a 25 basis point cut. However, there are many reasons why the RBA is more likely to take a “wait and see” approach to rates next week.

In China, markets begin a week long holiday with speculation a further stimulus package could be announced over the national festival. However, some analysts think a major package is unlikely ahead of the leadership change due in the next six to eight weeks. Similarly, in the US, the political and therefore fiscal landscape could change dramatically after presidential elections in the first week of November.

Locally, privately calculated data released yesterday shows house prices in capital cities rose significantly after the rate cuts of May and June, giving the RBA further reason to pause.

The “behaviour” of the AUD/USD appears to reflect a change. Here’s the shorter term chart from the CMC Tracker platform:

AUD/USD Four Hourly

The blue arrow points to a “rounding bottom”. Note the red candle at the centre – this suggests a clear rejection of lower levels. Subsequent moves breached the short term down trend, with a move over 1.0462 a likely indicator of higher levels. Whether this strength becomes a longer term trend or not will possibly be decided by a test of recent highs at 1.06 – which may come on disappointment next Tuesday.

More cautious traders may wish to wait for a break through 1.0462.  Others may use a set up similar to this:

Buy AUD/USD at current market, stop loss below 1.04 (trend line), target 1.0595

About michaelmccarthycmc

Chief Market Strategist - CMC Markets and Stockbroking Regular on ABC, BBC, Bloomberg, Channel TEN, CNBC, SBS and SKY
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