AUDUSD: Trading the Decision

10:56 AM


Source: http://www.entitysolutions.com.au/sites/default/files/timthumb%20(7)_1.jpg

USdollar Strength / Weakness
My long-term thesis has been for a lower USDollar given Donald Trump's direction for the economy, (please see the book Crippled America: How to Make America Great Again)

However, my thesis has changed slightly with the recent events in the US. It is proving a very difficult process for the new president to get the ship to move in the direction he wants.

If this continues to hold, and he cannot keep campaign promises, I think we could be looking at traditional economics or a reverting to a strong dollar outlook.

 My $USDCHF position has been rangy and being undecided about my thesis, I have regretted not getting out of the position earlier. Since there is no clear direction from here, I will still look to exit on recovery points.

As a macro investor, I pride myself in being able to exit when I find myself wrong. But that time is just not yet, but I am seeing the tides change.


Aussie Dollar Thesis
The $AUDUSD is a very interesting thesis for me right now. Thanks to @BrandonTurnerFx who provided a really great link on his site. Do know that an interest rate cut has been severely underpriced by the market. Analyst generally expecting no change.

However, given the technical positions and reasons below, I am prepared to take a short-term contrarian view here because


Fundamental view
a) the world we have recently been living in counts on Keynesian economics, or debt increasing whenever times get tough. With interest rates in Australia at 1.50% for an AAA rated country, there is ammunition for the central bank to rely upon.

For those newer to the market, talk of Zero-Interest Rate policies and Negative Interest Rate policies (outside Japan) were once considered things of myth just 3-4 years ago

b) Inflation data is higher, but still subdued and may be somewhat controlled with falling housing prices (I suspect a bubble here, but a story for another day).

c) much talk has also been given to the lowering of Australia's credit rating from the coveted AAA status. S&P indicating that they expect debt-to-GDP to be below 30% to see a continued hold of this ranking. We are however already above that mark, and the recovery of commodities might give the government confidence to execute a cut.

d) looking at forward growth plans for Australia, much is targeted at diversifying out of commodities, this requires capital investment and the such, printing money via lower interest rates may provide what the country needs.

e) much is being made about unemployment in the country, providing stimulus and lower interest rates can create jobs.

f?) a stronger Aussie Dollar is of no advantage to a country that depends on commodities. Although, no evidence has been seen before to take advantage of this.


Technical View
g) The cross has traveled quite a bit since late last year without a significant recovery, this may be an indication that a correction is due.

This has provided a range in which my 4 hr counter trend strategy may apply. With nearly all criterion fulfilled the conviction of this trade is increased. 

However, I will need 2 more candles closing below the 10EMA, this looks like a good entry if all goes according to plan. 


Sentiment (not really)
I have quite literally nothing to say here except maybe, 56% of the eToro community is selling.
Sentiment is not with us on this trade and I gather nothing from the COT report

Trade setup
I will have to take a smaller position with no possible move of stops because it is a correlated bet to my existing USDCHF holdings. Amount risk 1% of account at $450

Entries: Hopefully 4 hr bar stays below 10EMA at 10 am Singapore time, if so enter at 1/2 risk size, else 1/3 risk size will be taken.

Profit/Loss levels:
1) if the cut is made, further entry at 0.7600 for additional risk to create 3/4 or full risk trade. TP1 0.7489 (38.2% Fib levels) TP2 (0.73682)

2) if no cut is mentioned, the exit will be ASAP. If in the positive, will close immediately, else look to recover at breakeven.

Both will SL at 0.7730 just above last resistance.
Risk:Reward = ~2.09 (TP1) ~3.69 (TP2)

Summary: I always fall back to credit cycles and the theory behind it. In our Keynesian economic world, there is little question what the answer to a possible recession is, borrow more money. Will Australia do it? There is no evidence that they have pointed to a "yes", but for today this possibility is underpriced by the market, providing for some very lucrative asymmetrical risk-reward opportunities.

With the technical and fundamentals being to our advantage I will certainly like to engage in this trade.

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