AUD/USD – Evaporating Yield Advantage – 12/22/2016

AUD/USD – Evaporating Yield Advantage – 12/22/2016

As you know that we have been dip buyers in AUD/USD and NZD/USD from the beginning of the year.  But now the dynamics has changed.  Rising US yields ( Fed Dot Plot suggests 2 or more hikes in 2017 ) and positive US dollar sentiment will hurt both antipodean currencies.

Attraction of 0.7000 level will pull AUD/USD down. The question is, if AUD/USD can rise upto 0.7800 on dovish Fed, how much it can go down on hawkish Fed. If we consider 0.7000 as neutral level then somewhere near 0.6500 is definitely a possibility.  For those who are uninitiated with Forex market, please beware that this is not a stock, where you accumulate good stuff during the bad times and reap the rewards later on.  So just don’t keep on buying the dip in a hope that it will go back to 0.80 or more.  Well, it may but before that happens, it can go below 0.50 first to wipe your account out.  So just trade as it is – being in present & discounting the future !

What’s In Favor Of US Dollar

Donald Trump is the trump card in US dollar’s march higher.  We are not going to debate on how much his twitter-communicated policies will be effective  to warrant more hikes by Fed in 2017 but only thing we are sure about is that, market will keep on giving him benefit of doubt until there are more evidence to think otherwise.  So being reasonable, if we consider next 6 months then also it is long time period for US dollar to go on unchallenged.

Besides, if there is sudden equity meltdown due to black swan event then also USD will appreciate.

What Could Go Wrong

These things can derail USD rally or make AUD appreciate.

–  New president doesn’t live upto hype and that revelation comes sooner than expected.

–  If equities keep on flying higher and people’s vision becomes rosy  to spark risk rally. That will make AUD/USD and NZD/USD appreciate.

–  RBA ( Royal Bank of Australia ) smells inflation and turns hawkish

–  For the reason above to come true, we need next commodity boom.

So trade is to remain short AUD/USD , albeit cautiously.  Major resistance levels are, 0.7300 and 0.7400

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