Posted Thursday January 28, 2010 16000EST

AUD/USD

Support

   0.8900/10 Intra-day low for the current decline

   0.8800 Daily trendline support

   0.8730 December 23 intraday low

Resistance

   0.9045/70 100-day sma 0.9045/daily Kijun line0.9056/ daily Ichimoku cloud top 0.9071

   0.9100/25 Daily Ichimoku Tenkan line, multiple daily highs, 21-day sma

   0.9280 Highest intra-day high after Jan. 15 bearish engulfing line

Comments

One of the most popular trades over the last few months has been to be long AUD against just about everything. The reasons were manifold: Australia avoided recession altogether; the RBA was raising rates; commodities were rallying; and China's growth was robust. All of that is now in question. Monetary tightening in China and widespread expectations of more policy measures to come combined with slower than expected Q4 growth in S.Korea have propagated fears that projected increases in Asian demand during 2010 may have to be reined in. On Tuesday Feb. 2, the RBA is widely expected to raise rates one more time from 3.75% to 4.00, but thereafter they are most likley to move to the sidelines for several months at least. The strength of the overall global recovery is now in doubt, with slower 4Q German growth reported recently. Slower global growth is hurting commodity demand and leading to retrenchment in stocks and the broader 'risk-on' trade. Lastly, according to the most recent CFTC commitment of traders report, speculative long AUD positions are at their highest levels in nearly two years. The combination of the shift in underlying fundamentals and the extreme bias in positioning suggest the potential for a significant decline in AUD in coming weeks.

The Technical picture confirms the bleak outlook for AUD. A long-term double-top pattern is evident at the 93.00/50 area from the Nov. 2009 and Jan. 2010 peaks, as is the break of the overall uptrend back in the beginning of December. Price is currently below most key daily moving averages (21, 55, 100), with the 200-day sma down around 0.8500. Price is also now below the daily Ichimoku cloud (cloud base at 0.8992), and the Tenkan line is poised to cross down below the Kijun line in coming days, which with price below the cloud constitutes a 'strong sell' signal.

The strategy this week looks to sell half of a short AUD/USD position at 0.9030, and the second half at 0.9120, for an average short rate of 0.9075. I'm hopeful that we may see some strength pre-RBA, or in the post-RBA reaction. The stop loss will be at 0.9225 for a risk of about 150 points. More aggressive traders may want to go short at current levels (0.8960) and look to add above 0.9050. More conservative traders may wish to wait for a daily close below the 0.8850/8900 level. The take profit objective is for 50% at 0.8750, just above the December lows, and the second half at 0.8450 August 2009 highs, for an average t/p rate of 0.8600, or a potential gain of about 475 pips.