The board of Australia's central bank, the RBA, shocked the market yesterday after suggesting they may be getting ready for a rate cut. Such a policy would signal a significant shift from its long-standing tightening path. Is the Reserve Bank of Australia taking its cue from the Fed, and is this another signal of a global slowdown?
The Australian dollar plunged 1.5 percent overnight and was set for its biggest daily drop in a year. Elias Haddad, rates and FX strategist at Commonwealth Bank of Australia, said that while there was a risk the Aussie dollar could test $0.70, a more pronounced downward move was unlikely.
The Aussie dollar is down more than 1.5% today. The price had found support from the trend line since the beginning of the year, however it dropped after it found resistance under 0.7230 by the 200 DMA. The same happened to the December highs below 0.7400, when the 200 DMA marked a glass ceiling. In September the 0.7300 levels proved a resistance, when prices tested the 50 DMA. Today’s decline falls below the 50 as well as the 100 DMA.
The pattern since September paints a Head & Shoulders Continuation pattern, bearish in a downtrend. A typical H&S reversal demonstrates a shift in the supply-demand balance, as peaks and troughs begin posting in the opposite direction, while an H&S Continuation demonstrates that supply and demand remain on course, as peaks and troughs fail to reverse but continue in the same direction as the underlying trend. This can be seen on the chart since the 2017-18 top, below 0.75.
Note, also, that the current attempt to shift the course was met with resistance by the neckline of that massive double top, whose neckline was drawn at 0.7500.
Trading Strategies
Conservative traders would wait for a decisive downside breakout of the neckline.
Moderate traders may short after the price falls below this year’s uptrend line.
Aggressive traders should do the same as moderate traders, or short when the price returns to the 200 DMA. Meanwhile, they can enter a contrarian long position, hoping for a profit-taking rebound of today’s sharp decline.
Trade Sample – Long Position:
- Entry: A$ 0.7135
- Stop-Loss: A$ 0.7130
- Risk: 5 pips
- Target: A$ 0.7200
- Reward: 65 pips
- Risk-Reward Ratio: 1:7