Unwind of carry trade could hit the Australian Dollar

• Goldmans say RBA may be forced to cut rates
• Unwind of carry trade could hit the Australian Dollar

Sterling Australian Dollar (GBPAUD) FX Technical Analysis

I wrote last month that GBPAUD is at a bit of a crossroads at the moment, and it remains thus. Sterling still remains well bid against most majors and UK growth for Q2 came in at 0.9% which was above analyst’s expectations and suggests the UK will outperform most G20 countries this year. That said, there’s still no hint of very early UK interest rate hike (market still pricing in Feb 2015 as the first tightening), but if inflation and economic data continues to come in hotter, the pound will continue to attract buyers. The monthly Reserve Bank of Australia meeting wasn’t full of surprises, as they elected to leave their interest rates on hold once again which was widely anticipated and most analysts expect they’ll maintain interest rates at the current 2.5% for the remainder of the year. One dissenter that’s come out in the last 24 hours is a Goldman Sachs bond veteran who suggested that the RBA may be forced to cut rates before the end of the year to try and stem the inflow of foreign money. With the US Federal Reserve sounding more dovish and pushing back expectations for the first US interest rate increase, with stock markets still trading at record levels, risk appetite remains strong and consequently higher yielding currencies like the Aussie remain well bid (Australia’s not classed as an emerging market and therefore represents a more stable destination for capital inflows). However if the States starts growing at a more sustainable level (and todays Q2 GDP release of 4.0% will help), you could still see an unwinding of the AUD carry trade as the market moves back into US assets.

Technically GBPAUD remains in the same 5 cent range it’s found itself in for the last 4 months - as you can see from the chart, there’s a slight upward bias to the price action with slightly higher highs and lows. Last week GBPAUD broke below the 20 day moving average for the first time in a month as RBA Governor Stevens said he was content with the current monetary policy, and on this occasion he refrained on commenting about the overvalued Australian dollar when in previous annual policy speeches he used it as an opportunity to jawbone the Aussie lower. With the RBA’s next interest rate meeting scheduled for next Tuesday 5th August and the monetary policy statement on Friday, keep an ear out for any comments about the dollar - also next week Australian employment features with the policy makers hoping it comes in under 6% .

For the moment then, you’re best playing the ranges on GBPAUD - it looks to be heading back up towards 1.82 to test the 20 day moving average and in just a few hours the US Fed have their interest rate decision. If the comments coming out of the Fed are really bullish it should weaken the Aussie and help push GBPAUD back up a touch. Regardless, if you’re looking to buy AUD in the next month or two I would recommend you use limit orders to capture any favourable spikes in the exchange rates.

For AUD Buyers

As with the previous research paper target 1.82-1.8250 with limit orders for any short/medium term requirement. Longer term a break above 1.84 may still be on the cards. A failure of the market to close above 1.82 in the next week or so would be bearish and open up retest of 1.7888 support.

For AUD Sellers

Short term requirement place a stop loss above 1.82 if you’re very price sensitive or 1.8450 if you have a bit more leeway. Target 1.80-81 with limit order