One of the stars of the FX dashboard during the coronavirus crisis, the AUDUSD pair keeps performing. It is back at the highs, directly correlated with the US stock market.
As US stock indices reversed from their March low, so did the AUDUSD. In fact, all USD pairs began a risk-on move, driven by the strong flows in US equities.
The logic is simple – a lower USD leads to higher stock prices. After all, the Fed eased the monetary conditions and extended USD swap lines to other central banks in the world.
With the exception of the ECB, the response from the other central banks did not match the Fed’s. The RBA, for instance, barely bought bonds since it launched its 3-year target on the yield curve.
Because we entered in full summer swing mode, the AUDUSD will have a problem decoupling from the US equities. As it is not about the Australian Dollar but about the US Dollar, only a weak American dollar will trigger some weakness in the Aussie pair.
The RBA decision early in the week or the worse than expected Australian trade balance failed to send the AUDUSD lower. How about the technical picture?
Such a huge bearish divergence is difficult to ignore. However, its problem is the timeframe. As it forms on the daily chart, its takes a while for the price to break – if ever.
Not only that this bearish divergence took over two months now, but it looks like a rising wedge. Or, rising wedges are reversal patterns – another sign to get on the short side.
Nevertheless, shorting the AUDUSD here is like shorting the US equities. Going against such a strong trend during the summer holidays is not for everybody. Hence, caution is needed.
Here is a plan to short it. First, wait for the price to break and close below the blue line. Second, place a stop-loss order at the highs. Finally, target either 1:3 risk-reward ratio or simply go for 50% distance of the rising wedge, as price easily travels such distance after a wedge’s formation.
