Chart Of The Day: Trading The Australian Dollar’s Downtrend
The Reserve Bank of Australia (RBA) releases its next interest rate decision early Tuesday morning EDT. The overwhelming majority of economists expect the central bank to hold rates where they are.
That conclusion stems from growing uncertainty about consumer spending as Australia’s housing market slows and wage growth has crawled to just about its most sluggish pace ever. All this is also expected to drive a weak increase in inflation. If that’s not enough, concerns continue to escalate that the global trade war could further hamper the economy.
In a Reuters poll of 32 economists, 30 predicted that rates will remain the same; only one saw the possibility of a hike. Another predicted that rates will be cut. The RBA last cut rates to 1.50 percent in August 2016, where they currently remain. Expectations are for the central bank to be leaving rates at this level till September 2019.
Naturally, all this has been weighing on the Australian dollar, which has been gradually trending lower.
The Australian dollar has been trading in a falling channel since February, which led the currency, on April 24, to slip below its long-term uptrend line since January 2016. The oversupply retested and confirmed the long-term uptrend line on June 8.
Finally, on June 19, the Aussie completed a double-top (horizontal red line) and crossed below its macro uptrend line since February 2001.
Trading Strategies – Short Position Setup
Conservative traders would wait for the price to confirm the downtrend with posting a trough lower than the June 28, 0.7324 low.
Moderate traders may also short upon a pullback toward the channel-top at around the psychological round number of 0.7500.
Aggressive traders may short upon a pullback to the 0.7450 level, the top of consolidation since June 18.
Whatever your risk aversion, enter a trade only after establishing a clear trading plan, including entry and exit that would provide you with a minimum risk-reward ratio of 1:3.
Stop-loss: 0.7500 Risk: 40 pips
Target: 0.7340 (June 2017 low) Reward: 120 pips Risk-Reward Ratio: 1:3