The USD has lost ground this year due to a variety of factors related to positioning as well as a short-covering rally in industrial commodities. This has caused a rally in AUD as well.
Federal Reserve Bank of Richmond President Jeffrey Lacker said on 21-March-2016 that inflation will rise back to the U.S. central bank’s 2 percent target. This comment has re-focused the market on the rate hike expectations and consequently led to a USD rally. This theme will continue to play out as US inflation will print higher.
Levels are attractive to establish long USD vs the AUD, which has rallied more than 10% this year despite a weak fundamental environment for industrial commodities due to weak demand from China.
On the charts, it has retraced 61.8% of it’s down move from 0.8164 to 0.6828 at 0.7654, which will now act as a medium term resistance. The short term price action shows exhaustion of the up-move from 0.6828 to 0.7660 levels.
Trade: Short AUD/USD at 0.7530, with target 0.7400
Risk Classification: 4 – Aggressive
- Short via a spot market [with max leverage of 3x]
- Short via options, buying 6-month Put on AUD/USD with ATM strike 0.7470, cost 0.38% of notional
Risks to the trade:
- US inflation prints lower than market expectations and AUD continues to rally against USD. This is not the base case expectation, as pointed out above.
- There is strong demand for commodities from China, reflecting in robust export growth in Australia, which reflects in AUD strength. This is not the base case expectation, as fixed-asset-investment is slowing dramatically in China as the country looks to manage its build up of debt.