Chapter 33 08/14 AUDUSD: Incorrect Timing for Long AUD Positions Puts Pressure on Hedge Funds
Summary: The Australian Dollar (AUD) fell by 50 basis points against the U.S. Dollar (USD) during the Monday Sydney session, marking a decline of 0.12%. As of the European session, the asset was quoted at 0.6509, recovering most of the losses and staying flat at the low point reached on the previous Friday.
Fundamentals
The Australian Dollar was one of the weakest major market currencies last year and has been facing challenging times recently. The currency dropped 1.17% against the U.S. Dollar last week and has experienced an overall decline of 3.39% since the beginning of August.
The weakness of the Australian Dollar is still reflected in the economic fundamentals of Australia and China.
On one hand, Australia's inflation rate remains elevated at 6%. The Reserve Bank of Australia (RBA) has already tightened interest rates significantly, but tight labor market conditions and high inflation continue to drive wage growth, which remains a primary inflationary pressure.
Wage growth accelerated from 3.3% to 3.7% in the first quarter, reaching the highest level since the third quarter of 2012. Market consensus for the second quarter is also 3.7%. Monthly calculations suggest wage growth is expected to increase by 0.9%, higher than the 0.8% seen in the second quarter.
Strong wage growth is making the RBA's efforts to combat inflation more challenging. The central bank anticipates a gradual decline in inflation, expecting it to reach 3.25% by the end of next year and eventually fall to the 2%-3% target range by the end of 2025.
The RBA will release the minutes of its August meeting this Tuesday. Ahead of the last central bank meeting, there was a divergence in market expectations regarding whether the RBA would pause rate hikes for a second consecutive month or keep rates at 4.10%. Policymakers ultimately paused action, but mentioned the possibility of further tightening based on data. The meeting minutes on Tuesday might provide more clues about the decision to pause. RBA Governor Philip Lowe stated last Friday that the central bank remains open to further tightening but expects to make only "minor adjustments to calibrate policy."
On the other hand, as a major trading partner, China's economic slowdown is causing trouble for the Australian economy and the weakened Australian Dollar. Meanwhile, more negative news from China is worsening market sentiment.
Starting today, as China's property giant Country Garden suspends the issuance of nearly a dozen onshore bonds, concerns about the Chinese real estate industry have intensified in the market. Additionally, last Friday, the Zhongzhi Enterprise Group (ZEG), which manages around 1 trillion yuan, failed to meet payment obligations related to products issued by its subsidiary companies, further exacerbating investor pressure. This morning, the CSI Index opened below the 50-day moving average with a gap, while the Hang Seng Index dropped by nearly 2.50%, further dampening market sentiment.
In terms of the market, going long on the Australian Dollar at the wrong time is pressuring hedge funds.
Hedge funds had reached their highest level of bullishness on the Australian Dollar this year (consistent with our viewpoint from last Friday). According to data from the U.S. Commodity Futures Trading Commission (CFTC) until the week ending August 8, leveraged funds' net short positions in the Australian Dollar turned into net long positions, totaling 17,432 contracts. However, the Australian Dollar continued its decline thereafter. One possible factor is that the Australian Dollar might be sensitive to both wage and labor data and the gap between expectations, but the RBA is currently at or near the end of its tightening cycle.
Regarding technical factors, the trading volume of the Australian Dollar is quite significant. The breakdown of the AUDUSD last Friday clearly brought more pessimism to investors. Due to ongoing fragility in risk appetite, the AUDUSD might retest the year's low of 0.6458 and continue to drop below it; therefore, in the short term, I am inclined to sell rather than buy.
Technical Analysis
In our previous strategy, we believed that our viewpoint from last Friday aligned with that of hedge funds; however, we also mentioned that the bullish perspective wouldn't hold in case of a technical breakdown.
Specifically, the 4-hour technical chart displayed a downward slope, indicating that the currency pair's path of least resistance is downwards. A renewed drop below the psychological level of 0.6500 would expose the asset to the risk of sliding toward the May low of around 0.6458. The breakthrough of the latter would add momentum for the asset to touch a new monthly low of 0.6414. Bulls seeking an upward reversal would face significant resistance.
In the trading toward the end of last Friday, the asset fell below our psychological defense line. Therefore, I am inclined to sell rather than buy.
From a technical chart perspective, the bearish "double top" pattern continues to play out, and the asset is expected to develop a downward trend for D2 and D3. This formation resembles a "crab" pattern (specifically described as having extended legs). In terms of trading strategy, it is recommended to go short at highs.
Trading Recommendations
Trading Direction: Short
Entry Price: 0.6530
Target Price: 0.6259
Stop Loss: 0.6620
Valid Until: 2023-08-28 23:55:00
Support: 0.6458, 0.6425, 0.6386, 0.6273
Resistance: 0.6534, 0.6610, 0.6631, 0.6702
