Strategy
Sell AUD/USD at 0.7160 with a stop above 0.7380 and price target at 0.6760. Trade duration: 2-3 months
Technical View
Price was capped by the 20EMA for the past 4 weeks and this week, we are seeing the downtrend resuming its course again. Price is close to an important support at 0.6980. A break of this support is likely to send price lower to the Fibonacci 50% correction point at 0.6755. While Stochastic and MACD had given bullish divergence warnings, the trend is still strongly bearish and the price correction has so far been shallow at 38%. We think there is a high chance price can go lower to the Fibonacci 50% or even the 62% as this is the first rally after price hit a low at 0.5503, which is the lowest since 2002. MACD may have given a bullish divergence warning but MACD remains bearish. Similar, Stochastic is still near to the oversold extreme and is struggling to get out of the oversold zone. 20EMA is bearish and is hinting at a strong bearish price trend
Fundamental View
US 10-year Treasury yield rose to 1.848% as investors are now expecting the Federal Reserve to hike interest rate, starting in March 2022, at every meeting for the year 2022. That would mean 4 interest rate hikes in 2022, more than what was predicted in December last year. Powell, after last night FOMC meeting and in a press conference, told reporters there was “quite a bit of room to raise interest rates without threatening the labour market” and said the Fed was of a mind to begin lifting rates in March. A tight labour market and surging inflation fueled the Fed into becoming more aggressive in raising rates and tapering its balance sheet of US$8 trillion.
In contrast, the Reserve Bank of Australia is likely to keep rate steady at 0.25% until the year 2024 despite inflation running above the central bank’s target. Recently, its governor Lowe had said there is no change to the central bank policy although we doubt Australian interest rate would remain steady while global interest rates are on the rise. However, with every rate hike by the Fed every quarter, the interest rate differential between the US dollar and the Aussie dollar is likely to widen in the US dollar favour, leading to a stronger US dollar against the Australian dollar. Until the Reserve Bank of Australia decides to hike rates.