Revisiting AUD/USD this week now that we’re past very interesting developments from past weekend’s G20 meeting. Are sellers gonna hold this previously strong area of interest?
Resistance On AUD/USD At Previous Consolidation?
Last week, I threw AUD/USD on to my watchlist ahead a potentially volatile reaction to a highly anticipated G20 meeting. And in case you missed that the story of the weekend, it appeared that U.S. President Trump and Chinese President Xi came out of their meeting with a “truce” on trade tariffs, sparking a “risk-on” reaction in the global markets as soon as they opened on Monday.
This positive reaction was also seen in AUD/USD, which gapped higher at the Asia open, but since then has returned to Friday’s trade levels after confusion appears over the status of the U.S.-China trade deal. Add on to that fears of a slowing global economy and drama sparked by an inversion of the yield curve, and it looks like risk aversion sentiment could be the dominant market driver for now.
This all lines up for sellers to look at AUD/USD as the Australian dollar tends to take a hit during risk-off days because of its strong economic ties to China and its relatively high interest rate yield, while the Greenback is supported because of the relative safety of U.S. financial markets.
Looking forward, I think these developments and recent data showing a potentially slowing global economy (e.g., China’s Manufacturing Engine Starts to Sputter) could continue to put pressure on the pair. And seeing that the Reserve Bank of Australia won’t be raising rates anything soon per their latest monetary policy meeting, the risk is more to the downside that up in AUD/USD.
And volatility should continue come steadily as we’ll see top tier events for the rest of December from both the U.S. and Australia (most notably U.S. employment data and FOMC statement, as well as quarterly Australian employment and GDP data) that could give me the movement needed to make this a worthwhile trade.
With all of that, I will scale into a short position in AUD/USD, starting with a nibble position at current levels. My stop will be above the previous consolidation area and major psychological level of 0.7500, and my target will be around the previous swing low last seen around October that could draw in technical buyers. Here’s what I’m doing:
Short half position AUD/USD at market (0.7338), max stop at 0.7530, max target at 0.7050
Again, I’ll be risking only 0.25% of my account with this first trade and my potential return-on-risk is about 1.78:1 . I will likely add to this position if there’s a pop higher to the top of the consolidation range, upping my risk to my usual max 0.50% but increasing my max potential gain to around 2.50 R:R.
Of course, with other major themes driving markets and fast developments happening in geopolitical news, I will not hesitate to adjust quickly (i.e., cancel orders, close trade, reverse trade) depending on what happens and how the markets react.
Stay tuned and as always, remember to never risk more than 1% of a trading account on any single trade. Adjust position sizes accordingly. Create your own ideas and don’t simply follow what I do.
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