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Australian Dollar Primed for Reversal on Failure to Set Fresh High
Written by article default Saturday, 09 October 2010 10:38
Fundamental Outlook for Australian Dollar: Neutral
* Australian employment data impresses and Australian Dollar soars
* Australian Dollar hits all-time high – what’s next? Australia interest rate decision
The Australian Dollar hit a fresh record-high against its US namesake on significant Greenback weakness, but its inability to close the week at a fresh high suggests that momentum is waning. Last week we claimed that the AUDUSD could see a significant reversal if the highly-anticipated Reserve Bank of Australia interest rate announcement disappointed. The RBA indeed surprised markets in leaving rates unchanged through their recent meeting and the Aussie dollar fell on the news. Yet traders pushed the AUD higher all the same and limited hopes for a substantive turnaround. It will be critical to watch whether the AUDUSD is able to challenge fresh highs in the days ahead.
After such a packed week of Australian economic event risk, the days ahead will provide little in the way of foreseeable volatility. Yet forex options market volatility expectations remain especially high and we could nonetheless see big moves across AUD pairs. FX Futures and Options sentiment shows that we are clear bullish extremes on the AUDUSD pair. Options traders are the most bullish AUD as they have been in the past 90 days, while net speculative futures positioning is near its most bullish since the pair traded near parity in 2008. We believe it has become a question of “when” and not “if” the Australian Dollar will see a large correction. Yet timing—which is obviously the most important factor in any trade—remains anything but clear.
We will look for Sunday and Monday to set the tone for the subsequent week of trade. Seasonal cycles show that a currency pair is most likely to set its high or low for the week on Mondays and Fridays. Thus it will be critical to see if the AUDUSD can set a fresh high through Monday’s close. Given such high risk of correction, failure to close above record-highs could open up a big downward move.
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