AUDUSD Archives - Algorithmic and Mechanical Forex Strategies

AUD/USD short-term outlook based on recent economic reports

August 29, 2016 by Shaun Overton Leave a Comment

Before commodity markets started cooling off last year, the multi-decade commodity boom drove the Australian Dollar to all-time highs against the US Dollar severally. This caught the attention of the traders who were in many cases attracted by the interest rate differentials in the AUD/USD pairing. The duo benefit of this was that traders could take a long position on the AUD/USD and earn rollover from it; while at the same time gaining from the aggressive bull-run experienced then between the pairs.

The Australian Dollar (Aussie) has however in the recent past been subjected to negative economic outlook back at home due to the bear markets in the commodities markets especially the metals. The slow-down in the Chinese economy as they restructure their economic model to boost their local consumption also had negative impacts on Australia’s commodity exports; resulting to more pressure on the Aussie. This is a reversal of the past when the currency had been identified as one of the favored vehicles for traders.

The AUD/USD currency pair has been trading within the range of 0.7600 and 0.770 in the past weeks. The currency pair has appreciated by about 5.34% for the year-to-date. Recent developments in Australia and United States of America economic environments however have been shaping the AUD/USD price actions and affecting sentiments from the traders. Among the top economic news from Australia that will shape how the price of the pair will be fluctuating into the future include the decision by the Reserve Bank of Australia to cut the interest rates to 1.5% on August 2nd 2016. On the other hand, the US released better than expected payroll’s data for the month of July 2016 and that has had a positive impact on the dollar. Both these two major announcements will be shaping the trend of the pair in the markets in different ways and ultimately they will affect your trading decision on the pair.

In a bid to boost consumer confidence and stimulate a consumption driven economic growth, the Reserve Bank of Australia cut its interest rate to 1.5% in August 2nd 2016 after another cut in May 2016 to 1.75%. The goal of the bank is to increase money supply in the economy and boost the purchasing power of consumers in order to trigger an increase in production and hence ultimately end up with higher GDP growth. It is however feared that the move will result in inflation rising hence rendering the monetary policy intervention counter-productive. With the rising inflation the Australian Dollar would eventually find itself hurt through depreciation against other major world currencies including the US Dollar. To dispel the inflation fears, Mr. Alan Oster the chief economist at the Reserve Bank of Australia said that “the outlook for inflation remains very subdued with underlying inflation expected to remain below the bottom of the 2 to 3 per cent target band until mid-2018.”

On the US economy, the labor department released the July jobs report on August 5th which was a record higher than the projections from economic analysts. The report showed that the US created 255,000 new jobs in the month of July 2016 against a forecast of about 180,000 jobs by most analysts. This data caught the market as a surprise and triggered an upward rally at the equities markets across the US. Having the payrolls expanding is therefore a proof of the confidence that both the US public and private sectors have in their economy and this re-affirms the position of the United States of America as the strongest economy in the world. The dollar is now rallying on such positive news and hence gaining more ground against other major global currencies as explained by AOMarkets in their analysis, “A resurgent USD is dominating financial news headlines and US indices are enjoying the spillover effects.”

Taken together, the AUD/USD currency pair seem to be leaning favorably on one side based on the just released economic data from both the US and Australia. The USD is riding on positive jobs data and the implied strengthening of the US economy. On the other hand the AUD is faced with potential depreciation if increased borrowing due to the rate cut results in an increase in spending that might trigger inflationary pressures. In the short-run we can therefore expect the USD to rally against the AUD before the election fever peaks in the US.

Buying Dips and Selling Rallies: Putting the Odds in Our Favor

March 19, 2015 by Richard Krivo Leave a Comment

After a strong counter trend move, as long as the longer term trend remains intact, looking for opportunities to “buy the dip” and “sell the rally” can be a solid trading strategy.

When identifying a pair that is in an uptrend, the concept of buying the dip can be put to good use. The idea is that as the pair continues to move higher, invariably there will be pullbacks/retracements/dips that occur. When those take place, the trader is presented with an opportunity to enter the trade – buy on a dip – in the direction of the trend at a more favorable price.

Take a look at the historical 4 hour chart of the AUDUSD below for a visual on this concept…

Buying the Dip in an Uptrend

To time our entry into the trade, an oscillator can be used so we can enter when bearish (downside) momentum shifts to bullish (upside) momentum. In this case we chose Slow Stochastics. (Note the timing of the entry with the Slow Stochastics crossover to the upside in the circles.) When the buying on dips a stop can be placed below the lowest candle or wick that occurred during the retracement or dip. In this case, we also have a valid ascending trendline (black line) that can be used for stop placement below the trendline.

In a downtrend, the process would be reversed. Take a look at the historical 1 hour chart of the USDCAD below…

Selling the Rally in a Downtrend

To time our entry into this trade, we can enter when bullish (upside) momentum shifts to bearish (downside) momentum. Again we chose Slow Stochastics. (Note the timing of the entry with the Slow Stochastics crossover to the downside in the circles.) When selling on rallies a stop can be placed above the highest candle or wick that occurred during the retracement or rally. In this case we again have a valid descending trendline that can be used for stop placement above the trendline.

All the best and good trading,

Richard Krivo

RKrivoFX@gmail.com

@RKrivoFX

Identifying a Trend Change

February 19, 2015 by Richard Krivo 7 Comments

One of the questions most often asked of me is how, as a trader, do you know the trend has changed. While it is definitely an important question, the answer is also one of the most elusive – and the answer is by no means clear cut.

Let’s take a look at a historical Daily chart of the AUDUSD currency pair below…

The last candle on the left of this chart is dated December 15, 2011. This is when the uptrend depicted on the chart began. We can see that the uptrend consisted of price making higher highs and higher lows and breaking through the significant resistance level presented by the 200 SMA. Also, during the uptrend the AUD was one of the strongest currencies and the USD was one of the weakest.

When all is said and done regarding the uptrend, price reached its highest point on February 29, 2012. This bullish move to the upside lasted about two and one-half months and was comprised of roughly 1,000 pips.

So when did the downtrend begin?

To answer that, let’s look at the first range identified on the chart.

Oftentimes, when an uptrend comes to a halt, price action will trade in a range consolidating for a period of time. The upward trend “stalls” and the pair just bides its time until the market decides how the pair will continue to move over going forward.

In hindsight, we can see that when price broke out of that rectangle to the downside for the first time, THAT was the official beginning of the downtrend. However, since none of us possess that infallible crystal ball, no one knew that this was the end of the uptrend and the beginning of a prolonged downtrend. Only the passage of time will provide us with that answer.

As traders, what do we need to see that indicates a growing potential that a trend change is happening and is likely to continue?

Let’s reverse engineer what we saw happening in the uptrend. If we look for the opposite of an uptrend we should be looking at a downtrend.

Since higher highs and higher lows make an uptrend, than lower highs and lower lows will make a downtrend. In looking at the right hand side of the chart we can see that this in fact is taking place. The more this process of lower highs and lower lows continues, the greater the likelihood becomes that the trend will continue.

We also note that as this move to the downside continues, the AUD is becoming weaker and the USD is becoming stronger.

While at no point in this process is a trend change guaranteed, the more the move continues, the greater the chance becomes that a short term trend change will strengthen and continue to evolve into a long term trend change.

Let’s look at three areas that I monitor when considering whether or not a trend change has taken/is taking place.

1) If the pair continues to make lower highs and lower lows and take out levels of prior support as it moves down, the pair is building a downtrend. The longer that process continues, the more likely it is that there will be a trend change. So how long is longer? Again, there is no black and white answer. Aggressive traders will call the trend change earlier and start taking short positions sooner than will a conservative trader.

2) As price begins to move closer and closer to the 200 SMA, the closer it gets to it the more likely that we are looking at a potential trend change. Once it trades through the 200 SMA and closes below it, that is very compelling data that the trend has changed.

3) If the currency in the pair that has been the stronger currency has become the weaker currency in the pair and that change continues over time, that is pointing to the probability that we are looking at a trend change.

So while there is not much certainty in calling a trend change in the short term, the above three points are what I monitor to determine if a trend is continuing or losing momentum and ultimately changing its direction.

All the best and good trading,

Richard Krivo

RKrivoFX@gmail.com

@RKrivoFX