Not sure what to do with the Aussie? Well, here are 4 reasons why you might wanna consider taking a short bias on AUD/USD!
Prospect of another RBA rate cut
Last week, the Reserve Bank of Australia decided to cut rates by 25 basis points, bringing down interest rates to 4.25%. RBA officials pointed to ongoing concerns in Europe as one of the major reasons why they decided to cut rates.
Take note that central banks normally work in unison when implementing monetary policy. Aside from the RBA, the European Central Bank has also recently cut its base rate, while the Bank of England has expanded its asset purchase program. Also, let’s not forget that the Fed is on the hot seat right now, and QE3 may just be around the corner.
If other central banks decide to add more liquidity in their respective markets, it would signal a real concern that the global economy may encounter a double dip recession. Don’t be surprised if the RBA follows suit with another rate cut sometime in early 2012.
Big Boys Bias
Of course it also helps to know what the big boys are expecting. After all, they’re the ones pushing the markets around with their billions of dollars. Who wouldn’t wanna piggyback on their order flows?
Digging deep into their corporate lairs, I find it intriguing that some of the bigger players are actually rather dovish on AUD/USD over the next few months.
By the end of Q1 2012, The Royal Bank of Scotland predicts that the Aussie will be trading at .9500. Meanwhile, Standard Chartered, Bank of America, and HSBC Holdings are all calling for the pair to hit .9400.
The most dovish of them all? That would be Saxo Bank, who predicts a drop of over 1,000 pips and for AUD/USD to hit .9000! Talk about being bearish!
Overall risk aversion
Another reason to short the Aussie is the current market sentiment. If you’ve been keeping close tabs on the news, you’d know that there are a lot of uncertainties floating around and that most traders aren’t really in the mood to take on more risk.
One of the factors keeping risk aversion in the markets is the ongoing euro zone debt crisis. Last I heard, European officials seem to have moved on from the Greek debt drama and are now worrying about Italy and Spain. Those are the third and fourth largest euro zone nations respectively! So much for being too big to fail, huh?
Speaking of too big to fail, market participants are also becoming more concerned about the economic downturn in China, the world’s second largest economy. As I mentioned in one of my entries, recent data from the Asian superpower has been bleak, leading many to worry that its trade activity could slow down as well. And guess who has China as their number one trade partner? That’s right, it’s Australia!
As the cliché goes, a picture paints a thousand words. In the Aussie’s case, the charts paint quite a bearish story. From the daily chart, it looks like the pair has already broken down the head and shoulders pattern that Happy Pip pointed out the other week.
Looking further back, one can also notice that the pair just can’t seem to set new highs anymore. On top of that, AUD/USD already crossed below it’s 200SMA, suggesting that another strong downtrend is underway.
Then again, allow me to emphasize that this is just one side of the coin. As another saying goes, the only thing that’s constant is change. You don’t have to be around for as long as Dr. Pipslow has been to know that market sentiment could shift on a dime whenever something new comes up.
Besides, taking longer-term positions is tough and not for the faint-hearted. According to the School of Pipsology, position trading requires a lot of patience for potential retracements and huge price swings. Aside from that, staying updated with the current market news and practicing proper risk management are essential. With these unprecedented times, you never know when tables could turn!