Aussie to strengthen on consolidation in iron ore price

One of the worst performing currencies in the past two weeks was the Australian dollar. The currency had lost value against most of the G10 currencies.

In particular, the AUD/USD pair fell about 200 pips last week to reach a low or 0.7380. Lower than anticipated trade surplus and weakness in the price of iron ore were mainly responsible for the Australian dollar’s decline.

However, we expect the Aussie to bounce back in the week ahead on the basis of facts provided herewith.

During the Federal Reserve Open Markets Committee (FOMC) meeting held on May 3rd , the US Fed left the interest rates unchanged. While this was on expected lines, the optimism shown by Janet Yellen and her colleagues over the performance of the US economy pushed the odds of a June rate hike to 93%.

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Before the FOMC meeting took place, the money market was pricing in a 69% chance of a rate hike next month. The Fed also stated that the labor market continued to strengthen. The US dollar index moved up to 99.13, from 98.73 ahead of the meeting. Following the hawkish statement of the US Fed, the US dollar strengthened further against the Aussie. Thus, we can argue that most of the rate hike had already been priced in.

According to Thomson Reuters estimate, Chinese iron ore imports had decreased to 83.27 million tons in April, from 86.47 million tons in the previous month. While the Aussie shipments fell to about 5 million tons m-o-m to 53.9 million tons in April, the exports from Brazil were up by about 2 million tons to 18.48 million tons. The production disruption in Western Australia, caused due to cyclone Debbie, was one of the main reasons for a decline in shipment volumes. Thus, analysts expect volumes to pick up in May.

During the Reserve Bank of Australia’s policy meeting held last week, the interest rates were left unchanged at 1.5%. However, the market was quick to notice the slight hawkish stance of the RBA. The RBA also stated that the inflation is in line with the central bank’s expectation. This is contrary to the usual statement that “low inflation remains a concern”. Thus, analysts believe that the RBA would only contemplate on tightening the policy in the future. So, on the basis of probable consolidation in the price of iron ore and slight hawkish stance of the RBA, we can expect a short-term rally in the AUD/USD pair.

The AUD/USD pair had broken the descending trend line, as shown in the image below. Furthermore, the pair has bounced off the short-term support at 0.7380. The momentum indicator is also making new highs. Thus, we expect an uptrend in the AUD/USD pair.

AUD/USD Pair: May 8th 2017

The analysis can be traded by opening a long position, near 0.7380, in the AUD/USD pair. Sticking to basic rules of trading, a stop loss order should be compulsorily placed below 0.7320. The long position can be sold near 0.7510 where the next major resistance exists.

A call option contract expiring on or around May 16th can be bought to benefit from the anticipated uptrend. It is also better to purchase the contract when the AUD/USD pair trades near 0.7380.