Entering a core AUDUSD short - TDS

Ned Rumpeltin, European Head of FX Strategy at TDS, notes that the AUDUSD spot has come within a single pip of the specified entry level (0.7610) on our intended short position.

Key Quotes

“We have decided to take this opportunity to enter this position in our model FX portfolio at 0.7595. We are targeting a move down to 0.6895 with a stoploss at 0.7880. This level is slightly above the 38.2% retracement level of the trading range since 2014.” 

“The AUD is the best performing G10 or major EM currency YTD. We believe it is now time to fade this move. AUDUSD looks overbought in our view. While we see some risk spot could squeeze a bit higher in the very short-term, risk/reward increasingly favours the downside in our view.”

“We believe the broad correction in the USD against G10 currencies is coming to an end. While the greenback has fully participated in the ebb and flow of the “Trump Trade” since November’s election, the roots of our bullish USD view run deeper. In our view, the market expectations that have taken shape over the last several weeks have acted more as an accelerant—and intensifier—of a dynamic already underway.”

“The US is enjoying a tangible cyclical divergence from other major economies as several macro headwinds there have diminished. Specifically, the manufacturing and corporate earnings downturns appear to have improved while the inventory cycle has become more constructive. With wage growth on the rise and inflation measures edging higher, Fed communications have taken on a more confident tone about the possible pace of rate hikes to come.”

“The Australian economy has turned in a mixed performance in recent months. While we look for underlying inflation to edge up to 1.7% in Q4, labour market activity remains soft. We continue to see the RBA taking rates higher toward the end of this year, but this is driven by concerns over household debt and financial stability risks.”

“Commodity prices have provided AUD with some support. Crucially, however, iron ore prices look stretched relative to fundamentals. We expect lower prices to prevail from here.”

“In addition to our existing USD longs against the CAD and NZD, this position reflects a notable divergence between current spot levels and a ’fair value’ assessment based on short-term rate differentials. Positioning is slightly short in AUDUSD, but we do not think this presents any meaningful constraint at this time.”