The Australian dollar experienced a sharp bout of selling during the Asian session as a resurgent US dollar continued to charge. Subsequently, the pair has retreated from its challenge of the medium term trend line and now the short side is in focus. However, is the short push a genuine move…or a trap for the unwary?
There is plenty of negative bias to go around for the AUD as the Chinese devaluation and equity rout continue to take their toll. The pair had managed to claw its way to 0.7340 before being hit with, what could only be considered as a strong wave of selling, before retreating back towards the 0.73 cent handle.
As we go to the presses, the pair is currently meandering around the 0.7320 level which is quite close to the weekly low. It looks almost certain that the New York session is likely to challenge the key 0.7300 level and any breach could see short sellers clamouring to bid the pair down towards 0.7233.
Also, taking a look at the relative strength indicator is illuminating in that it shows a pair in decline, within neutral territory, but nearing an area where a turnaround is a very real possibility given the indicators historical bias. Subsequently, the market is being cagey as to the depth of any additional bearish leg.
The moving averages have also turned relatively sour with the 12 crossing over the 30EMA as they both start to head south. Although relatively lagging in nature, the indicators seem to match much of the pent up selling pressure seen within the price action.
Fundamentally, the Australian dollar is facing a battle on multiple fronts as the PBOC devaluation and the continuing rout in commodity prices act like a wrecking ball upon the beleaguered economy. Having said that, there have been some bright points in the past week, with the RBA indicating that there are some structural changes underway as investment moves into the non-mining sectors.
Regardless of these facts, FX traders are a heartless bunch and are likely to bid the pair lower in the coming weeks. Subsequently, there is plenty of scope for a short play on the pair whilst keeping a tight stop around the 0.7364 level.
Ultimately, the bearish leg is most definitely in place, but be aware of the rising risk of a retracement from the 0.7245 level which could result in a great big bear trap for short sellers.