Talking Points:
AUD/USD has broken a major trend line on a Daily chart.
Speculative Sentiment (SSI) has flipped negative for AUD/USD.
Positive rollover interest pays traders who are long the Aussie.
Anytime we (as traders) can find multiple reasons to buy or sell something, we are more likely to place the trade and feel more confident the trade has an edge. But oftentimes, I see traders only focusing on one type of analysis. Today we will look at the AUD/USD currency pair through the perspectives of a technical trader, a sentiment trader, and as a fundamental trader.
AUD/USD Technicals – Bullish
If you’re like me, then we like to start off looking at a pair with a Daily chart. It can give us a sense of what price might be doing on a longer term basis and can shape which direction we have a bias towards. It’s a good idea to look for trends, ranges, and breakout opportunities.
The AUD/USD Daily chart stands out to me as a breakout to the upside. Drawing a trend line from the October 23rd high to the April 10th and May 14th highs, we can see price has broken above this trend line and has held above this level for the past couple of days.
Learn Forex: AUD/USD Daily Chart – Breaking Trend Line
(Created using Marketscope 2.0 charts)
You may have also noticed the Relative Strength Index’s trend line has broken to the upside as well, giving us two confluent triggers for a bullish position.
AUD/USD Sentiment – Bullish
Sentiment is my favorite Forex trading tool. I credit it with turning my trading history from red to black, so I give it a lot of weight when it comes to picking my direction bias. This past week, we have seen Aussie sentiment flip where there are now more people selling the Australian Dollar than buying it. Since SSI is a contrarian indicator, we want to do the opposite of the retail trading crowd and look for buying opportunities. Negative SSI is a bullish signal for the AUD/USD.
Learn Forex: AUD/USD Speculative Sentiment Index (SSI) – Flipping Negative
(Screen capture from DailyFXPlus.com)
DailyFX updates the general public with their SSI readings every Thursday, but it is updated twice a day if we have access to DailyFX Plus. This keeps us up to date with current shifts in sentiment and could get lead us to enter trades earlier than others following the weekly public updates. We are currently in a situation where the public page is showing a positive SSI reading, but those in the know with DailyFX Plus access can see SSI has flipped to negative. For more information on accessing DailyFX Plus, click here.
AUD/USD Fundamentals – Bullish
Interest rates are one of the main driving forces of FX. Investors tend to go where they can obtain the greatest yield, including those that participate in the currency market. So it makes sense to look for this type of yield ourselves, even if we consider ourselves more so as traders than as investors.
The Reserve Bank of Australia currently holds a target interest rate of 2.5% for the Australian dollar, which on its own sounds pitiful. But 2.5% is pretty good when compared to the Federal Reserve’s target rate of 0.25% for the US Dollar. So how do these figures apply to our potential trade? They apply by allowing traders to buy higher yielding currencies against lower yielding currencies to earn what’s called “rollover interest.” Rollover is applied to any trades open at 5pm New York time.
Learn Forex: AUD/USD Rollover – Currently Paying Traders 0.42 pips/day
(Created using the Trading Station Desktop Platform)
The AUD/USD rollover stands at $0.42 for a 10k trade, or 0.42 pips/day that you have the trade open. We tend to put more weight on rollover when the potential trade is longer term. After all, the more days we are in the trade, the more rollover we could potentially collect. So from a longer term fundamental perspective, it would make sense to look to buy the AUD/USD pair.
The Awesome Aussie
So, those are 3 arguments that can be made for buying the Australian Dollar against the US Dollar; the technically based trend line break, sentiment flipping to a negative value, and fundamentally based mismatch in interest rates creating a positive yield for buyers. But as always, perform your own due diligence before placing any trades on your own account. Also, feel free to utilize a demo account to practice trading risk-free before trading with real money.
Good trading!
—Written by Rob Pasche
To contact Rob, email rpasche@dailyfx.com.
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