Short AUDUSD after Fed waxes hawkish at Jackson Hole
Trade view: shorting AUDUSD 0.7550-75, stop 0.7630, target 0.7380
The US dollar strengthened sharply in the wake of Fed Chair Yellen’s speech at the Fed’s Jackson Hole symposium, as the Fed appears more willing to hike rates than was previously thought likely by the market. Factors on what could drive AUDUSD lower from here:
- A further upgrade of the Fed’s hiking potential will be necessary if this week’s US data is reasonably positive, particularly Friday’s US jobs report.
- AUD has been a recent beneficiary of the “reach for yield” theme that has seen investors piling into long duration bonds and even stocks (for those unwilling to ) The AUD is one of the last developed market currencies with a policy rate above 1% and the market is desperate for every bit of yield it can get, but Friday, the hawkish Fed saw US interest rates spiking higher (bonds weaker) and risk appetites souring. Friday’s speech could herald the end of the reach for yield theme.
- Rate spreads have recently dramatically favored the USD over the AUD as the market prices in rate cuts for the RBA while now catching up to price in higher odds of rate hikes for the Fed.
- USD inter-bank funding rates have been rising ahead of key legislative changes to the US money market in October and could rise further.
- Technically, the outside day bearish engulfing reversal is the technical development that has bears looking lower here for the currency pair, together with the fall of local support around and below the 0.7600 area.
Risks to the trade: volatility risk, or too tight a stop placement, is one risk. Others include US data risks that could see the USD weaker, whether today’s PCE inflation report for July, Thursday’s ISM Manufacturing Survey, or Friday’s US jobs report. The next large risk for AUD traders is the RBA meeting next Tuesday.
Time frame for the trade: approximately two weeks, though we could reassess if nothing is happening ahead of the RBA meeting next Tuesday.
Short term AUDUSD chart.
We target the 61.8% retracement of the rally off the lows around 0.7380. Note the outside day bearish reversal and the crumbling of the local 0.7600/0.7575 area support (orange line) after the reaction to Yellen’s Jackson Hole speech.
5-year weekly AUDUSD chart
A long-term chart of AUDUSD.
Yours sincerely,
John J. Hardy | Head of FX Strategy
