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Australian Dollar Research Report

Published: Wednesday 29 July 2015

Whilst the Greek crisis appears to have calmed down it’s the collapse in Chinese stock markets that has weighed on the Australian Dollar. Try as they might the Chinese government have been unable to stem the tide of selling which has seen stock markets more than halve in 2 months. Measures such as threatening short sellers with jail and massive cash injections have not been enough to sure up the markets  witnessed by the 8.5% drop for the benchmark Shanghai index on Monday, it’s worst performance for 8 years. Another $100bn worth of Yuan was pumped into the sovereign funds last night but the government’s effectiveness has been called into question with some speculating they will withdraw their support of the market.

The Reserve Bank of Australia have continued to state that further depreciation of the Australian dollar is “both likely and necessary” whilst deciding to leave the cash rate on hold at 2% at its July 7 meeting. They’ve determined that it was appropriate to assess economic and financial information in the coming months before reconsidering the outlook for monetary policy. Some analysts have seized on that, as well as stronger jobs data, suggesting the RBA will soften its language towards the level of the currency when its August monetary policy statement is released on August 4 - that in turn could lead to short covering (as market participants buy AUD to cover their short trades boosting the value of Aussie). Nonetheless there’s ongoing downward pressure on commodities generally and should Chinese economic data continue to disappoint it should push GBPAUD higher.

You look at the GBPAUD chart and you have the definition of an uptrend - since May the pound has rallied 12.5% against the Aussie. At the moment it looks like this trend is set to continue up towards to next price target of 2.23 (which equates to a 50% retracement of the 2002 high to the 2.13 low). The saying “the trend’s your friend” could be rather apt in this instance, particularly if GBPAUD continues to trade above the 20 day moving average which will act as the first area of support should a change in trend appear. Looking at the longer term weekly/monthly charts it’s certainly the case that the Australian Dollar is oversold but that doesn’t necessarily mean that it’s going to reverse quite yet, just that a downward correction in GBPAUD is getting closer.

The sensible thing to do then is to split your risk, trade a portion of your funds here and more if the prices continues to move in your favour, averaging up your overall rate as you go. Also it would be very wise to place a stop loss order below the 20 day moving average to act as safety net so that it the prices reverse you’re not chasing a falling, instead your stop loss order will trigger purchasing your AUD before prices fall further. You can also move your stop loss order up as market increases - for example moving it up from below 2.02 mid-June up to under 2.10 now, locking in 8 cents of gain without having to actually trade . Based on the current GBPAUD daily chart, the major price target is 2.20-2.23 - if you’re holding on for that you should place a stop loss under 2.10.