Analys från DailyFX
Is Today the Start of a Major Australian Dollar Bounce?
Summary: Why is the Australian Dollar so weak, and could its very recent bounce be the start of a larger bounce? We think so, and here’s why.
The Australian Dollar trades at multi-year lows as the second-worst performing G10 currency year-to date, but markets can only move in one direction in so long—why might it bounce?
Several weeks ago I wrote that sharp AUD declines might have actually been the “Canary in the Coal Mine” for the SP 500. In other words: sharp Australian Dollar declines pointed to similar weakness in stocks and broader financial markets. Frankly I’d rather be lucky than good, but the SP 500 set an important top the very next day. What now?
Stocks seem to have stabilized somewhat after the SP posted two consecutive weeks of declines, and indeed our short-term technical forecast suggests the index might continue to hold key lows. Could this point to an Australian Dollar bounce? Maybe, but first we a key driver of Aussie weakness—speculative trades.
The chart below shows that Australian Dollar positioning is at its most extreme on record—futures speculators are extremely net-short, while commercial hedgers are at their most defensively long in history.
Australian Dollar Futures Positioning at Record Extremes
Data source: CFTC Commitment of Traders Report, Chart Source: R
As our Senior Technical Strategist wrote yesterday, such extremely one-sided Australian Dollar positioning warns of reversal. All the while, our retail forex trader sample shows similar positioning extremes:
Retail Forex Speculators are Extremely Long the Australian Dollar
Data source: FXCM Execution Desk, Weekly Sentiment Table
I wrote on Thursday that retail positioning warned of a potential AUDUSD bounce, but it was too early to try and pick a bottom. Just as well—it continued onto fresh lows.
But nothing moves in a straight line, and positioning is far too one-sided in our opinion for the sell-off to continue. We’re likewise seeing signs of popular sentiment extremes as reputable newspapers use headlines such as “Australian Dollar plummets” to describe recent price action.
I can see the counterargument now—“but won’t Reserve Bank of Australia interest rate cuts and falling gold prices continue to hurt the Aussie?”
That’s certainly possible, but our Senior Currency Strategist favors a near-term low in Gold prices. All the while, the Australian Dollar/US Dollar interest rate differential itself is at risk of pullback.
I’ll be the first to admit that it’s dangerous to try and buy into such sharp declines, and indeed our sentiment-based trading strategies have done well in selling into Australian Dollar weakness. In fact, our volatility-friendly Breakout2 system is currently short the Australian Dollar against the US Dollar, Japanese Yen, and Euro.
I further wrote on Monday that breakout trading remained attractive on the AUDUSD, EURAUD, and AUDJPY. So clearly this is somewhat of a departure from what I’ve recently said.
Yet there are too many signs of a potential sentiment and price extreme to ignore—I would avoid selling the Australian Dollar at current levels and will look to buy against recent lows.
Summary of Positions in DailyFX PLUS Trading Signals
Source: DailyFX PLUS Classic Trading Signals
Forex Correlations Summary
View forex correlations to the SP 500, SP Volatility Index (VIX), Crude Oil Futures prices, US 2-Year Treasury Yields, and Spot Gold prices.
Data source: Bloomberg. Chart source: R
SEE GUIDE ON READING THE ABOVE CHART
— Written by David Rodriguez, Quantitative Strategist for DailyFX.com
Receive future special reports on the Australian Dollar and other studies via this author’s e-mail distribution list with this link.
David specializes in automated trading strategies. Find out more about our automated sentiment-based strategies on DailyFX PLUS.
Contact and follow David via Twitter: https://twitter.com/DRodriguezFX
What’s inside:
- EURUSD broke the ‘neckline’ of a bearish ‘head-and-shoulders’ pattern, April trend-line
- Resistance in vicinity of 11825/80 likely to keep a lid on further strength
- Targeting the low to mid-11600s with more selling
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Coming into last week we pointed out the likelihood of finally seeing a resolution of the range EURUSD had been stuck in for the past few weeks, and one of the outcomes we made note of as a possibility was for the triggering of a ’head-and-shoulders’ pattern. Indeed, we saw a break of the ’neckline’ along with a drop below the April trend-line. This led to decent selling before a minor bounce took shape during the latter part of last week.
Looking ahead to next week the euro is set up for further losses as the path of least resistance has turned lower. Looking to a capper on any further strength there is resistance in the 11825-11880 area (old support becomes new resistance). As long as the euro stays below this area a downward bias will remain firmly intact.
Looking lower towards support eyes will be on the August low at 11662 and the 2016 high of 11616, of which the latter just happens to align almost precisely with the measured move target of the ‘head-and-shoulders’ pattern (determined by subtracting the height of the pattern from the neckline).
Bottom line: Shorts look set to have the upperhand as a fresh month gets underway as long as the euro remains capped by resistance. On weakness, we’ll be watching how the euro responds to a drop into support levels.
For a longer-term outlook on EURUSD, check out the just released Q4 Forecast.
EURUSD: Daily
—Written by Paul Robinson, Market Analyst
You can receive Paul’s analysis directly via email bysigning up here.
You can follow Paul on Twitter at@PaulRobinonFX.
Why and how do we use IG Client Sentiment in trading? See our guide and real-time data.
EURUSD: Retail trader data shows 37.3% of traders are net-long with the ratio of traders short to long at 1.68 to 1. In fact, traders have remained net-short since Apr 18 when EURUSD traded near 1.07831; price has moved 9.6% higher since then. The number of traders net-long is 15.4% lower than yesterday and 16.4% higher from last week, while the number of traders net-short is 0.4% higher than yesterday and 10.5% lower from last week.
We typically take a contrarian view to crowd sentiment, and the fact traders are net-short suggests EURUSD prices may continue to rise. Positioning is more net-short than yesterday but less net-short from last week. The combination of current sentiment and recent changes gives us a further mixed EURUSD trading bias.
— Written by Christopher Vecchio, CFA, Senior Currency Strategist
To contact Christopher Vecchio, e-mail cvecchio@dailyfx.com
Follow him on Twitter at @CVecchioFX
To be added to Christopher’s e-mail distribution list, please fill out this form
Why and how do we use IG Client Sentiment in trading? See our guide and real-time data.
GBPUSD: Retail trader data shows 38.2% of traders are net-long with the ratio of traders short to long at 1.62 to 1. In fact, traders have remained net-short since Sep 05 when GBPUSD traded near 1.29615; price has moved 3.4% higher since then. The number of traders net-long is 0.1% higher than yesterday and 13.4% higher from last week, while the number of traders net-short is 10.6% lower than yesterday and 18.3% lower from last week.
We typically take a contrarian view to crowd sentiment, and the fact traders are net-short suggests GBPUSD prices may continue to rise. Yet traders are less net-short than yesterday and compared with last week. Recent changes in sentiment warn that the current GBPUSD price trend may soon reverse lower despite the fact traders remain net-short.
— Written by Christopher Vecchio, CFA, Senior Currency Strategist
To contact Christopher Vecchio, e-mail cvecchio@dailyfx.com
Follow him on Twitter at @CVecchioFX
To be added to Christopher’s e-mail distribution list, please fill out this form
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