Aussie signals downtrend on macro-economic issues

On the basis of the RBA’s mild hawkish tone in the monetary policy statement issued in May, we had forecasted a rally in the AUD/USD pair, with entry and exit near 0.7380 and 0.7510, respectively.

Additionally, we had also expressed our willingness to invest in a call option. Both trades resulted in a profit, as forecasted. However, as explained below, there are multiple reasons to believe that the current rally has reached exhaustion.

Thus, in the short-term, we forecast the AUD/USD pair to decline from the current level of 0.7510.

Morgan Stanley has recently released a mid-year report on the outlook of the Australian dollar. The report categorically states that the Aussie would decline over the next year-and-a-half due to a decline in the commodity prices, weak labor market, poor inflationary pressure, and unprofitable banks.

As China shifts from manufacturing to a service oriented economy, exports from Australia would see a downturn. Added to this is the poor outlook for iron ore, which is struggling to hold near $60 per ton. The Australian fiscal budget has outlined infrastructure spending plans, which would positively impact the economy. However, the expenses are going to be tackled by the additional taxes levied on banks. The costs could be likely passed to customers and that might lead to further decline in consumer spending.

Considering these factors, the RBA would be hard pressed to hold the interest rates unchanged in the medium-term. On the other hand, the US Fed is expected to raise rates at least two more times this year. The odds of a rate hike in June are still high. In the Europe, the ECB is expected to taper the asset purchase program at the end of this year. Thus, attractiveness of the Australian dollar as a carry trade currency continues to diminish. Considering the above macro-economic issues faced by Australia and the highly probable Fed rate hike in June, we expect the AUD/USD pair to decline in the short-term.

Technically, the stock has formed a bearish Gartley pattern as shown in the image below. Additionally, the historic price chart indicates a major resistance for the stock at 0.7540 levels. Thus, a price revision towards the downside can be expected.

As a currency trader, we would like to open a short position in the currency pair near 0.7540, with a stop loss order above 0.7650. If the AUD/USD pair moves down as predicted then profits would be booked near 0.7380.

We would like to mimic the setup in the binary market by investing in a put option when the AUD/USD pair trades near 0.7540. To boost the probability of success, we would select a date around June 16 th for the expiry of the option.

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