AUD/USD Faces Downside Risks with Failure at Channel Bound

A stronger than expected Australian employment report helped the AUD/USD erase recent losses, with the pair now attempting to establish a new bullish trend. The high yielder had been under pressure following a rate hold and dovish outlook from the RBA at its recent policy meeting. The resulting declining yield expectations may be too much to overcome for the com-dollar despite the signs of continued domestic growth. The broader trends are keeping the central bank cautious and until Europe resolves its debt issues and the U.S. economy gets on track expect a measured approach which may limit upside potential for the pair. Potentially adding to the bearish case is speculation that China will tighten rates following this weekend's inflation report. Expectations of slower growth in Australia's main trading partner will dim the outlook for its own domestic picture, perpetuating policy maker's dovish sentiment. Additionally, we could see a broader flight to safety as China has been the engine for global growth, which also favors the greenback. Therefore, we are looking for bearish momentum to return with another failed test of the upper channel bound. However, concerns over U.S. yields have started to generate anti-dollar sentiment and could be supportive.

Levels to Watch:

-Range Top: 0.9880 (Trend, Pivot)

-Range Bottom: 0.9450 (Trend, Pivot)

Charts created using Strategy Trader– Prepared by John Rivera

Suggested Strategy

• Short: Place an entry at 0.9750-below 12/8 Low
• Stop: Set the stop to 0.9850-100 pips in risk
• Target: The first target is 0.9536-12/1 low

Trading Tip – We are taking a cautious stance based on the lingering anti-dollar sentiment and waiting for further confirmation of a change in direction. We will wait for a break below the recent swing low on 12/8 before taking a short position as we believe that downside risks are greater and a little patience could increase our profit potential. However, we run the risk that downside momentum is short lived and the best opportunity could be to wait for another failed test of the descending trend line to take a position.

Event Risk for U.S. and Canada

Australia – Following the RBA rate decision and employment report upcoming releases will be minimized in importance, but there are two key metrics that we will keep our eye on. Dwelling starts for the third quarter could posses market moving potential, if it shows that housing demand remains firm despite higher interest rates. New construction also bodes well for future hiring which will put upward pressure on consumer prices. Therefore, the DEWR skilled vacancies report should be monitored as it will provide insight into the strength of the labor market which will be monitored by policy makers to determined the potential for higher wages.

U.S. – The biggest risk for the dollar will be the upcoming FOMC rate decision, where we could see the central bank hint at additional QE beyond their recently announced $600 billion. Fed Chairman Bernanke didn't rule out more purchases in a "60 minutes interview", which could be reflected in the post release comments. We could see the greenback stumble if markets start to price in additional stimulus. Consumer confidence, retail sales and inflation data will also cross the wires and offer potential volatility. Strong demand, rising optimism and prices will raise the outlook for a rate hike potentially generating support. However, signs of improving domestic growth and subdued inflation could be a catalyst for risk appetite which favors the high yielding Aussie.

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