The market has been showing some resiliency today, but we do not expect this to last. We contend that the push higher has a lot to do with the surprising overnight rate decision from the RBA to leave rates on hold. However, this by no means should be construed as any form of a bottoming within the domestic economy or global economy for that matter. We therefore look to use any rallies back to the 20-Day SMA as a formidable entry point for a playable short trade.
Fundamental Catalyst – The market has been showing some resiliency today but we do not expect this to last. We contend that the push higher has a lot to do with the surprising overnight rate decision from the RBA to leave rates on hold at 3.25% after expectations had been that the Australian central bank would cut by 25bps. The implication and suggestion to the broader global macro market is that the economy is not as exposed as perceived and that aggressive accommodative easing is no longer necessary. This has sparked some buying back into risk with all of the higher yielding currencies benefiting as a result. However, we question the central bank’s decision and hardly feel that this should be taken as any sign of a bottom in the Australian economy or the global economy for that matter. The Eurozone remains in significant trouble and more problems are arising out of the region on a daily basis. Additionally, the better than expected overnight wholesale price data out of Germany is hardly anything to get excited about, with the overwhelming data out of the region now consistently disappointing. Finally, at this point, there are some significant stops built up below 1.2515 and the markets are well known for their ability to seek out the pain and target those levels. The sub-1.2515 stops should be treated no differently and we look for these stops to be cleared in the very short-term.
Techs – The market has taken out Monday’s low to trade to 1.2540 ahead of the latest reversal back above Monday’s high to 1.2680. This sets up the potential (provided we get a positive close) for a bullish outside day. However, given the proximity to 1.2515 and likelihood that the level will indeed be taken out over the short-term, we do not see much room for follow through from any bullish reversal days. The 20-Day SMA now comes in by 1.2770 and this level has proved to be a formidable resistance point over the past several months with multiple attempts to close above failing. The last time the market closed above the 20-Day SMA was back on January 2, 2009. While we concede that potential now exists for some decent upside over the coming hours, ultimately, any sizeable intraday rallies should be used as good sell opportunities. As such, we will use a rally back to the 20-Day SMA today as an entry point for a short trade. Strategy: SELL @1.2770 FOR A 1.2420 OBJECTIVE, STOP @1.2910. Stops to be trailed to cost on a break back below 1.2700. If trade triggers and 1.2700 not broken, position to be closed out at NY close (5pm EST) on Tuesday. Recommendation to be removed if not triggered by NY close on Tuesday.
Written by Joel Kruger, Technical Currency Analyst for DailyFX.com
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