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Aussie to decline on soft building approvals data

australian dollarThe fall in the price of crude oil to about $41 per barrel and the uncertainty in Europe eroded the value of the Mexican Peso, while strengthening the riskier assets such as the Australian dollar.

However, it seems like the party is over for the Aussie as of now due to the rate cut announced by the RBA (Reserve Bank of Australia) and the persisting inflation problems that threaten wage growth. However, as explained underneath, Mexico has its own share of problems. Thus, we forecast a range bound situation in the AUD/MXN pair, both technically and fundamentally. As of now, the AUD/MXN pair is signaling a short-term decline.

On Tuesday, the RBA slashed the benchmark interest rates to 1.5%. The move brings forth the underlying issues of low inflation and poor wage growth in the Australian economy. Around the globe, the Central banks of developed economies are trying to stir growth and increase the inflationary pressure by announcing rate cuts. Thus, the RBA was left with no choice other than to follow the footsteps of other Central banks. Further reluctance would continue to strengthen the Aussie and lead to even a deflationary scenario. However, the analysts warn that the RBA’s move will only aggravate the issue and the country may get caught in the loop of ever declining interest rates as in the case of Japan.

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According to the Australian Bureau of Statistics, the building approvals in June declined 2.9% in seasonally adjusted terms. The analysts anticipated a 0.9% growth in the building approvals. Similarly, in June, Australia recorded a negative trade balance of $3.2 billion, against the market’s forecast of -$2 billion.

The decline in the price of crude oil continues to put pressure on the Mexican Peso. In July, to propel the battered Peso, the Central Bank of Mexico (Banco de Mexico) surprised the market with a 50 basis point rate hike. However, the Peso remained strong only for a short period of time. The reason is that the second largest Latin American economy recorded an economic contraction, the first of its kind in three years, in the second-quarter. The headwinds faced by the Australian and Mexican economy are expected to keep the respective currencies weak. Thus, fundamentally, neither the Aussie nor the Peso can reign over the other. So, a range bound movement is only expected in the AUD/MXN pair.

Technically, the stochastic indicator shows an overbought state in the currency pair. On the downside, minor support exists at 14.27, while major support exists at 14.23. The path of least resistance for the asset is on the downside. Thus, we forecast the AUD/MXN pair to slide to 14.23.

AUD/MXN Pair: August 5th 2016

AUD/MXN Pair: August 5th 2016

So, a Forex trader should consider taking a short position in the AUD/MXN pair near 14.40. A stop loss order can be placed above 14.46. The short position is recommended to be closed at 14.25 levels. With a risk to reward ratio of about 1:2, the trade can be certainly taken with confidence.

A binary trader can consider trading a one touch put option to gain from the forecasted decline of the AUD/MXN pair. The target level for the put option trade is 14.25 or greater. A time period of two weeks would be sufficient for the expiry period of the contract.


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