Chapter 1 08/22 AUDUSD: Go Short at the Highs as the Downward Structure Will Be Fully Extended
Abstract: The AUDUSD rose for the second consecutive day, reaching the threshold of 0.6459 in the European session on Tuesday. On Monday, Standard & Poor's downgraded several U.S. banks and revised their outlook, and the USD faced some subsequent selling.
Fundamentals
On Monday, Standard & Poor's downgraded several American banks, indicating that the rapid rise in interest rates is putting pressure on the financing and liquidity of many U.S. institutions. Some subsequent selling faced by the USD on Tuesday boosted the AUD. However, market investors increased their bets on the Fed's further interest rate hike, which pushed the yield of 10-year US Treasury Securities to 4.366%, the highest level in 2007, and continued to support the USD.
On the other hand, the People's Bank of China (PBOC) lowered the one-year loan prime rate (LPR) by less than expected. The decision of the PBOC shows that the one-year loan prime rate (LPR) will be lowered by 10 basis points from 3.55% to 3.45%, and the five-year loan prime rate will remain unchanged at 4.2%.
We believe that there is an increasing risk that the AUDUSD will fall below 0.6000 before the end of the year. The downward trend of the AUD can only be reversed if China introduces a large-scale stimulus plan to boost the commodity-intensive infrastructure. Investors will pay close attention to the headlines about China's economic difficulties, because it may affect the AUD, which reflects China's economic prospects.
On the other hand, the recent suspension signal issued by the Fed has not formed a long-term trend of weakening the USD, because the soaring yield of long-term government bonds has provided new support for the yield. Unless the Jackson Hole Economic Symposium held on Friday brings surprise from the doves, it seems likely that the USD will rise further.
As for the AUD, before the price tests around 0.6200, there was almost no obvious support for the AUDUSD. The moderate tone of the Reserve Bank of Australia (RBA) in August seems to be the background of the unfavorable factors facing the AUD, rather than the main driver of the AUD's decline.
Looking ahead, investors will also wait for the Standard & Poor's Global Purchasing Managers Index of Australia and the U.S. released on Wednesday. More risk events will be the focus of this week with Federal Reserve Chairman Powell's speech at the Jackson Hole Economic Symposium. Investors will get clues from the event and look for trading opportunities around the AUDUSD.
Technical Analysis
The AUDUSD broke out of the hourly formed symmetrical triangle pattern during the European session and the price also stabilized above the 50-period Exponential Moving Average (EMA) at 0.6420, but is still facing resistance around the 200-period Exponential Moving Average (EMA) at 0.6455.
Although the AUDUSD has taken a breather after completing a "crab" pattern of price movement, the AUDUSD has been under bearish pressure after hitting new lows since November last year. As a series of bearish factors continue to weigh on the AUDUSD's price, it is expected to face a geometric increase in selling after the rally.
Momentum indicators continue to dominate the current downtrend. Specifically, the Relative Strength Index (RSI) has reached its lowest point since the March 2023 correction. Similarly, the Average Directional Index (ADX) has moved slightly higher, thus indicating a bearish trend in the market. Interestingly, the stochastic oscillator remains in the oversold zone and remains wide of its SMA. It may have to hover for a while before signaling a reversal.
If the price falls below the August 18 low of 0.6380 again, the downward trend will be consolidated and the AUDUSD will fall to a new nine-month low near 0.6300. Breaking the latter will make the AUDUSD fall to a low of 0.6272 on November 3, 2022. It is recommended to go short at the highs.
Trading Recommendations
Trading direction: Short
Entry price: 0.6420
Target price: 0.6253
Stop loss: 0.6530
Deadline: 2023-09-05 23:55:00
Support: 0.6404, 0.6364, 0.6299
Resistance: 0.6459, 0.6484, 0.6522
