After the Reserve Bank of Australia left rates unchanged on Wednesday at 2%, we saw AUD/USD rally above .7400; however, we see that as short-lived. Despite keeping rates at 2%, the RBA referenced declining commodity prices and relatively soft economic performance as possible risks to further currency depreciation.
Furthermore, Australia’s economy relies quite heavily on the export of iron ore and other industrial metals to China which has seen gradual economic shifts as it becomes more consumer-oriented and services-driven compared to its usual reliance on industrial growth. This has led to a decline in exports of industrial metals from Australia that has already been battered by declining iron ore prices, causing downward pressure on AUD.
In the US, a rate hike looks imminent with September fed funds futures implying a 48% probability, nothing that there needs to be a “significant deterioration” in economic indicators to derail a rate hike after the next meeting. This has driven broad US dollar support and currently driving commodity prices even lower. Commodity currencies such as NZD, AUD, CAD and NOK are most vulnerable to further downside as the US prepares for a rate hike.
Technically .7400 has been a level that AUD/USD has struggled to move below until 2 weeks ago, however RBA’s decision to keeps rates unchanged sparked a short lived rally above .7400 but that level was rejected immediately. We see this event as a good entry for short AUD/USD positions with stops just above .7500 and target of .7000 for spot traders. For options traders, look at Sept XDA 70/74 Put Vertical that trades at $1.28 per contract. This gives the user a max reward of $272 per contract if AUD/USD is at or below .7000 by September expiration with a max risk of $128 per contract. View the details of this trade using OptionsPlay right here.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
Tony Zhang
Tony Zhang is a specialist in the financial services industry with over a decade of experience spanning product development, research and market strategist roles across equities, foreign exchange and derivatives. As the current Chief Strategist for OptionsPlay, Tony currently leads the research and development of their OptionsPlay Ideas & Portfolio platform. He has leveraged his interest in financial technology and product development to provide innovative reimagined solutions to clients and the users they seek to serve. Previously, he spent 7 years at FOREX.com with a capital markets and research background as a market strategist specializing in equity and FX derivatives markets.
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