Selling AUDUSD as momentum has faded
Trade: Selling AUDUSD around 1.0495 - 1.0510
Stop: 1.0535 bid
Targets: 1.0405 and 1.0360
In support of the prospect of AUDUSD downside:
- Aussie has been underperforming relative to global asset markets and its normal positive correlation with risk appetite, which may be a sign of waning enthusiasm for further bidding up the long-overvalued currency
- The recent FOMC minutes have sowed seeds of doubt on whether the Fed balance sheet will continue to widen beyond what is already in the known easing pipeline.
- Complacency is widespread as measured by general FX volatility and implied volatility in other asset classes. With US earnings season approaching and US fiscal austerity possibly in the pipeline from the delayed aspects of the fiscal cliff deal, asset markets may go on the defensive soon.
- Technically, there has been complete indecision for several days after the pair tried to head back higher within the range, raising the risk of downside resolution on the faded momentum, particularly if an anticipated bout of risk aversion materializes.
- Risk/reward is attractive on a tactical basis for testing the downside waters.
Trade management: If the pair trades below 1.0470, the stop can be lowered to 1.0515 bid and then to break even or better if 1.0450 gives way on an hourly close. The targets can be seen as generic guidance - with those looking to take profit more quickly considering taking half off at the first target and then the other half at the lower target.
Risk: Risk/reward is fairly tight here, so a bout of rallying asset markets could see this one taken out quickly at any time
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