This text is from blog famous currency strategist Joel Kruger .
Well…things are certainly starting to get interesting. While the Euro remains under pressure against the buck and seemingly poised for further weakness following the latest break and close below 1.2800, Aussie has managed to rally to fresh multi-session highs above 1.0400. The relative outperformance in the Australian Dollar comes as no surprise following the move by the RBA to leave rates on hold at 3.25%. Although analysts had the outcome at about 50/50 (for either holding or cutting by 25bps), the decision to stay pat was in some ways more certain, given the RBA’s repeated reluctance to err on the side of restriction.
See daily forex technical analysis video from joel Kruger:
STICKING TO MY GUNS – The central bank statement was rather balanced, highlighting concerns over the outlook for the global and domestic economy, but at the same time conveying optimism on a perceived China stabilization. Yet, as per my commentary on Monday, I have gone ahead and established a fresh short position above 1.0400 in anticipation of a topside failure over the coming sessions. I will only exit the trade on a weekly close above 1.0700, and am targeting a drop back towards 0.9000 over the coming weeks.
“APPROPRIATE”…CMON GUYS! – Throughout the global crisis, it seems to me that the RBA is always a step or two behind when it comes to making the appropriate monetary policy adjustments. Each time the RBA has failed to offer accommodation when necessary, they are eventually proven wrong and ultimately need to respond with additional easing. So to think that rates are “appropriate” at current levels would be foolish in my opinion. I am betting that investors will start to price in another cut at the final meeting for the year in early December. I believe that the central bank is also mistaken with its more upbeat China assessment. As a side note, The Telegraph was out with a great article on China and the political backdrop that I think is worth a look (thanks Lawrence for forwarding to me).
TECHNICAL REINFORCEMENT – Technically, the Aussie short trade is even more compelling, and warns that the Australian Dollar is vulnerable over the coming weeks and months. This is a market that has been showing clear signs of the formation of a major longer-term top (2011 peak), with a sequence of lower tops since. The most recent lower top now looks to be in place around 1.0600, and from here, any additional gains should continue to be well capped around 1.0600 in favor of fresh declines back towards 0.9000.
METHODOLOGY DISCLAIMER – But if you do subscribe to my methodology, it is very important that you position accordingly, understanding that it is still possible that the market attempts to retest 1.0600 before ultimately heading lower. I am not saying or hoping that we do in fact go to 1.0600, but at the same time, I will be prepared if we do. As per above, I will only exit the position should the market put in a weekly close above 1.0700. Otherwise, I will hang on and enjoy the ride. One of the things I have learned over the years is that if it doesn’t happen in a day or two that it isn’t reason for concern. I need to give my positions room to breathe and can not be dissuaded or discouraged should the market move out of my favor.
