M6A1! trade ideas
Aussie Dollar - Don't Worry Be Hoppy!China re-opening, widening trade surplus, and a fragile USD to keep Australian Dollar bouncing higher ("AUD") in 2023.
The Dollar Index (“DXY”) is sinking through support levels even as the AUD rises past key resistance points. Amid solid tailwinds favoring AUD and formidable headwinds facing the USD, this case study argues for a long position in CME Micro AUD/USD Futures expiring in March 2023.
Thus far, the AUD is 2023's top-performing currency. It appears to have raced ahead of itself with near-term consolidation expected before resuming its ascent. Hence, an entry at 0.695 with a target of 0.736 and a stop-loss at 0.668 will deliver a reward-to-risk ratio of 1.52.
WHAT DRIVES THE VALUE OF A CURRENCY?
Supply and demand for a currency establishes its value. Monetary policy also has an impact on its value.
Currencies with high domestic interest rates appreciate while those with lower rates get weaker. Nations enjoying greater trade surplus command a stronger currency. Currencies in high demand for savings, trade settlement, tourism, and education also appreciate.
AUD, as a commodity currency, enjoys multiple tailwinds, making it resilient going into 2023. Economic re-opening in China after a shift away from zero-covid stance is expected to increase demand for commodities. Easing political relations saw China secure its first Australian coal cargos in two years. Bullish commodity prices will boost AUD.
Australia's trade surplus widened to $13.2B in November when it was expected to decline to $10.5B. Growing trade surplus bodes well for AUD.
China re-opening and easing political relationships benefits Australia in more ways than one. Chinese travelers and students are starting to return to Australia further boosting demand for its dollar.
AUSTRALIA IS A TOP COMMODITY EXPORTER MAKING AUD A COMMODITY PLAY
Australia produces copious quantities of crude and three-fourths of that is exported. Australia is one of the planet’s largest exporters of iron ore and coal. Iron Ore forms the single largest source of export revenue worth AUD 133 billion in 2021-22 according to Mineral Council of Australia. Australia also exports aluminum.
As seen in the chart below, correlation between CME Iron Ore Futures prices to CME Micro AUD/USD Futures is tight at upwards of 90% and tends to move in tandem. Bullish Iron Ore prices augur well for the AUD.
CHINA IS AUSTRALIA’S NUMBER ONE TRADING PARTNER
More than half of every commodity is imported into China. It should be no surprise that China is Australia’s top trading partner.
Importing more than USD 100 billion of Australian products, China accounts for more than 30% of all Australian exports. China is the world’s largest steel producer for which Iron Ore is a key ingredient. Predictably, China accounts for 80% of Australian Iron Ore exports.
China is expected to remain a key producer and consumer of steel as its One Belt One Road requires huge investments in steel-intensive projects both within and outside its borders.
RBA TO REMAIN HAWKISH IN FENDING OFF DOMESTIC INFLATION
Australian inflation eased to 6.9% in October 2022 but shot back up to 7.3% in November beating expectations. The Reserve Bank of Australia (“RBA”) remains hawkish in the fight against inflation as it wrestles to bring inflation down to the 2%-3% target.
Economists anticipate that it might take a quarter or two before reaching “peak-inflation” in Australia. Meanwhile, RBA will keep or lift rates higher which will strengthen AUD even more.
KING DOLLAR SHEDS ITS SHINE
The US Dollar Index (DXY) measures the US dollar’s value against a basket of six currencies comprising of Euro, Japanese Yen, British Pound, Canadian Dollar, Swedish Krona, and the Swiss Franc. The USD rallied strongly in 2022 while investors’ flight to safety tendency demonstrated dollar’s heft as the global reserve.
However, the DXY has shed 11.2% since touching a high of 114.778 on September 28 to close at 102.204 on January 13, 2023. Slowing inflation in the US is expected to ease the Fed’s hawkish aggression towards rate hikes. This will force the dollar to further lose its value against other currencies.
Anticipating this, asset managers have reduced their net long positions in the DXY by 45% over the last twelve weeks while leveraged funds continue to entrench their net short positions by 3% during the same period.
TECHNICALS POINT TO AUD BULLS AND DXY BEARS
On January 6, AUD pushed past the 20-day moving average it has tested since December 27. The Bollinger Bands having narrowed until then is now broadening out with the AUD breaking out to the top. With the AUD trading around the Pivot point, it is now trending up and has traded past the first key resistance on January 12.
Mirroring the same trend but to the reverse, the DXY attempted to rally past the 20-day moving average, but only to fail and sink below the immediate support at 102.643. The Bollinger band having narrowed until January 6 has given way with the DXY breaking out downwards shedding more than 2% with five daily red candles in succession.
A bull in AUD and a bear in USD creates a compelling backdrop for a bouncy AUD in the near term. In vindicating this sentiment, the options open interest in CME Micro AUD/USD Futures shows a put-call ratio of 0.83 pointing to bullish view among options market participants.
TRADE SET-UP
Each long position in CME Micro AUD/USD Futures (March 2023) provides exposure to AUD 10,000. If AUD moves by 0.0001 point, the Micro AUD/USD future moves by $1.
Entry: 0.695
Target: 0.736
Stop Loss: 0.668
Reward/Risk Ratio: 1.52
Profit at Target: $410
Loss at Stop Loss: $270
MARKET DATA
CME Real-time Market Data helps identify trading set-ups and express market views better. If you have futures in your trading portfolio, you can check out on CME Group data plans available that suit your trading needs www.tradingview.com
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Trade ideas cited above are for illustration only, as an integral part of a case study to demonstrate the fundamental concepts in risk management under the market scenarios being discussed. They shall not be construed as investment recommendations or advice. Nor are they used to promote any specific products, or services.
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AUSTRALIA DOLLAR Futures (6A1!), H4 Potential for Bearish DropType: Bearish Drop
Resistance: 0.69610
Pivot: 0.68560
Support : 0.67920
Preferred Case: On the H4, with the price moving below the ichimoku cloud, we have a bearish bias that the price may drop from the pivot at 0.68560, which is in line with the swing low and 61.8% fibonacci retracement to the 1st support at 0.67920, where the 78.6% fibonacci retracement , 78.6% projection and previous swing high are.
Alternative scenario: Alternatively, price could rise to the 1st resistance at 0.69610, where the overlap resistance and 38.2% fibonacci retracement are.
Fundamentals: Construction Work Done q/q, showing -3.8%, dropped significantly from last period and forecasted, which has negative impact on overall employment and spending.
Potential Bullish ContinuationTitle: AUSTRALIAN DOLLAR FUTURES (6A1!), H4 Potential for Bullish Rise
Type : Bullish Rise
Resistance : 0.69555
Pivot: 0.68620
Support : 0.68100
Preferred Case: On the H4, with prices moving above the ichimoku indicator and breaking out of the descending channel , we have a bullish bias that price will rise from the pivot at 0.69295 where the overlap support is. If price breaks above the intermediate resistance at 0.69830 at the swing high in line with the 78.6% fibonacci retracement, we will have upside confirmation that price will continue to rise to the 1st resistance at 0.70705 in line with swing high.
Alternative scenario: Alternatively, price may break pivot structure and drop to the 1st support level at 0.68600 in line with the overlap support.
Fundamentals: Following Gov Lowe’s comments regarding an expectation for inflation to reach 6 to 7% and the requirement for further interest rate increases, we have a bullish bias on the Australian Dollar.
AUSTRALIAN DOLLAR FUTURES (6A1!), H4 Potential for Bullish RiseType : Bullish Rise
Resistance : 0.69555
Pivot: 0.68620
Support : 0.68100
Preferred Case: On the H4, with prices moving above the ichimoku indicator and breaking out of the descending channel , we have a bullish bias that price will rise from the pivot at 0.68620 where the overlap support is to the 1st resistance in line with swing high resistance and 127.2% fibonacci extension .
Alternative scenario: Alternatively, price may break pivot structure and drop to the 1st support level at 0.68100 in line with the pullback support, 61.8% fibonacci projection and 50% fibonacci retracement .
Fundamentals: Following Gov Lowe’s comments regarding an expectation for inflation to reach 6 to 7% and the requirement for further interest rate increases, we have a bullish bias on the Australian Dollar.
AUSTRALIAN DOLLAR FUTURES (6A1!), H4 Potential for Bullish RiseType : Bullish Rise
Resistance : 0.69555
Pivot: 0.68620
Support : 0.68100
Preferred Case: On the H4, with prices moving above the ichimoku indicator and breaking out of the descending channel , we have a bullish bias that price will rise from the pivot at 0.68620 where the overlap support is to the 1st resistance in line with swing high resistance and 127.2% fibonacci extension .
Alternative scenario: Alternatively, price may break pivot structure and drop to the 1st support level at 0.68100 in line with the pullback support, 61.8% fibonacci projection and 50% fibonacci retracement .
Fundamentals: Following Gov Lowe’s comments regarding an expectation for inflation to reach 6 to 7% and the requirement for further interest rate increases, we have a bullish bias on the Australian Dollar.
AUSTRALIAN DOLLAR FUTURES (6A1!), H4 Potential for Bullish RiseType : Bullish Rise
Resistance : 0.69555
Pivot: 0.68620
Support : 0.68100
Preferred Case: On the H4, with prices moving above the ichimoku indicator and breaking out of the descending channel, we have a bullish bias that price will rise from the pivot at 0.68620 where the overlap support is to the 1st resistance in line with swing high resistance and 127.2% fibonacci extension.
Alternative scenario: Alternatively, price may break pivot structure and drop to the 1st support level at 0.68100 in line with the pullback support, 61.8% fibonacci projection and 50% fibonacci retracement.
Fundamentals: Following Gov Lowe’s comments regarding an expectation for inflation to reach 6 to 7% and the requirement for further interest rate increases, we have a bullish bias on the Australian Dollar.
AUSTRALIAN DOLLAR FUTURES (6A1!), H4 Potential for Bearish DropType : Bearish Momentum
Resistance : 0.67660
Pivot: 0.67175
Support : 0.66485
Preferred Case: On the H4, with RSI moving along the descending trendline and price moving along the descending trendline, we have a bearish bias that price will drop to the pivot at 0.67175 where the 127.2% fibonacci extension, 100% fibonacci projection and swing low support are. Once there is downside confirmation of price breaking pivot structure, we would expect bearish momentum to carry price to 1st support at 0.66485 where the 161.8% fibonacci extension and 100% fibonacci projection are.
Alternative scenario: Alternatively, price may rise to the 1st resistance at 0.67660 where the overlap resistance is.
Fundamentals: There was an increase in employment rate and decrease in unemployment rate for AUD today, giving us a bullish bias for the Australian Dollar. We'll need to exercise caution for this setup because our fundamentals and technicals are not completely aligned.
AUSTRALIAN DOLLAR FUTURES (6A1!), H1 Potential for Bearish DropType : Bearish Momentum
Resistance : 0.68560
Pivot: 0.67685
Support : 0.66595
Preferred Case: On the H1, with price moving below the ichimoku cloud and along the descending trendline , we have a bearish bias that price will drop to the pivot at 0.67685 in line with the swing low support and 78.6% fibonacci projection. Once we have downside confirmation that price has broken past pivot structure, we would expect bearish momentum to carry price to the 1st support at 0.66595 where the -61.8% fibonacci expansion and 78.6% fibonacci projection are.
Alternative scenario: Alternatively, price may rise to the 1st resistance at 0.68560 where the pullback resistance is.
Fundamentals: Due to the Euro dollar dropping, we have a bearish bias of the australian dollar.
Potential Bullish ContinuationTitle: AUSTRALIAN DOLLAR FUTURES (6A1!), H4 Potential for Bullish Momentum
Type : Bullish Rise
Resistance : 0.70605
Pivot: 0.68735
Support : 0.68360
Preferred Case: On the H4, with price breaking the descending trendline and moving in an ascending trendline on our RSI, we have a bullish bias that price will rise from the pivot at 0.68735 at the multiple swing low to the 1st resistance at 0.70605 at the overlap resistance in line with the 50% fibonacci retracement. take note of intermediary resistance at 0.72660 at the multiple swing high in line with the 50% fibonacci retracement and 78.6% fibonacci projection.
Alternative scenario: Alternatively, price may reverse off the pivot and drop to the 1st support at 0.68360 at the horizontal swing low in line with the 100% fibonacci projection and 61.8% fibonacci projection.
Fundamentals: Following concerns on commodity prices, we have a bearish bias that price will continue dropping further.
A Kangaroo Hop!Things seem to be going well down under. With Iron Ore prices jumping close to 8% last week, Australia, the largest exporter of the raw material stands to benefit greatly. In 2021, Iron Ore exports totaled close to US$120 billion. This contributes greatly to the demand side pressure on the Australian dollar.
Looking at the charts, the AUDUSD pair is currently trading at the bottom of the channel support on the 1-hr time frame. With the 200-period moving average right below current levels, we think downside resistance will prove strong and prices will bounce off the bottom of the rising channel quickly.
Stay tuned to the Reserve Bank of Australia’s meeting tomorrow and time your entry there! Assuming no surprises and the technical supports are intact, we favor the long side for the AUDUSD pair.
Entry at 0.7190, stop below 0.712. Targets are 0.7346 and 0.7460.
Disclaimer:
The contents in this Idea are intended for information purpose only and do not constitute investment recommendation or advice. Nor are they used to promote any specific products or services. They serve as an integral part of a case study to demonstrate fundamental concepts in risk management under given market scenarios.
