Aussie Rules
Fundamentals
Australian Dollar futures are lower for the second consecutive session, after Friday's non-farm payroll data showed the US economy losing fewer jobs than expected. If the pattern of stronger employment and housing reports continues, it raises the prospect of the Federal Reserve raising interest rates by the end of the year to rein-in inflation. The stronger than expected non-farm payroll data may continue to support the greenback in the near-term, as it gives foreign exchange traders a reason to take profits on short US Dollar positions. There is also some concern that the value of the currency has appreciated too quickly since March, rising from the mid 0.6000's to the low 0.8000's. This, though, can be seen as a healthy correction and a positive for the market over the long haul. Parabolic markets are signs of a bubble, so long-term Aussie bulls actually welcome the pullback. While the US data can be seen as a negative force for the Aussie in the near-term, the prospects of high inflation could benefit the currency, as Australia is a commodity exporting nation. Prices of base metals, Gold, Cotton and Wheat have all posted solid gains in recent weeks, giving the Aussie solid support. Australia's GDP has been much more positive than other industrialized nations due to the fact that China's industrial sector seems to be reviving more quickly than initially anticipated. Interest rate parity will likely also play a major role in the Aussie's valuation going forward. The Reserve Bank of Australia did not act as aggressively as other central banks, leaving its interest high relatively and making an Aussie/Yen carry trade attractive.
Trading Ideas
Given the bullish long-term fundamentals and bearish near-term technicals, some bullish traders might be looking for the September Aussie to pull back to the 0.7675 level so they may enter the long side of the market. Instead of using stops and limit targets, some traders may possibly choose to enter into a collar trader, which would essentially offer similar protection, but could prevent a trader from getting whipsawed on a temporary spike below critical support. After entering into the long futures positions, traders may wish to sell an August 0.81 call and buy an August 0.74 put at even money or better. The maximum profit on the trade is $4,250 if the futures close above 0.8100 on the August 7 expiration date, while the maximum loss would be approximately $2,750 if the futures close below 0.7400.
Technicals
The recent correction has not done any significant chart damage. Looking at the continuous chart for the Aussie, the technically overbought conditions on the RSI likely triggered some of the selling pressure. Prices have not yet confirmed a flatter uptrend line or support at 0.7675, suggesting prices may come back to test this level. Failure to hold support here suggests prices could come back to test the 38.2 percent Fibonacci retracement at 0.7498. Prices have pulled back to the 20-day moving average in early trading. Closes below the average suggest that a near-term high may be in place.
Rob Kurzatkowski, Senior Commodity Analyst
