I’m going with a countertrend trade on GBP/AUD as I think the fundamental drivers are starting to shift for both the U.K. and Australia. Is it reversal time for both currencies?
In my EUR/GBP trade review, I argued that sterling bulls might be pulling back their long positions, which means a good chance we’ll start seeing a broad outflow from sterling to other currencies.
Today, the RBA decided to hold off on any rate cuts AND gave us rhetoric that we’ll most likely not be seeing rate cuts in the near future. This is a big change from past rhetoric when the RBA talked down the Aussie in December, and while it doesn’t mean we’ll start seeing rate hikes, it’s a good probability that traders who were betting that we would get rate cuts will start lightening up.
So, this trade idea is based on the thought that the strong sentiment and long trends from 2013 in GBP and AUD will start to lighten up or maybe even reverse. I’d like to short GBP/AUD on a pullback higher since the U.K. just came out with a positive surprise to their construction PMI data. I’m gonna do it with a small amount of risk and a wide stop since the MPC meeting is coming up this Thursday, but I think based on recent data and rhetoric from BOE Governor Carney that 7% unemployment rate isn’t an automatic trigger for rate hikes, there’s a chance of the event being bearish for sterling. Of course, that’s just a guess, so we’ll have to wait and see. Here’s what I am doing:
Short half position GBP/AUD at 1.8500, stop at 1.8800 and trail 300 pips, max profit target at 1.7400
I’m only risking 0.50% of my account on this one, and with this trade structure, I have a potential reward-to-risk ratio of over 3.6:1; I am also looking to add to this position if triggered and goes my way. Of course, anything can happen in the forex markets, so if the story changes and/or I’m completely wrong, I’ll be sure to reassess and adjust quickly if necessary.