UK based foreign currency expert, Patrick Reid discusses recent trends and expectations
AUD/USD – Broad bearish bias
I’m a little confused so please give me some slack. More on this later.
AUD/USD appears to have formed a base at .7330 and it doesn’t make sense. Weak housing, steady funding cost pressure, off balance books in China getting squeezed and a largely pristine macro picture from the US sets up for more selling - but apparently not. As with everything, appearances can be deceiving.
Macro has met Mr Market Positioning and the latter is winning. I spoke to a couple of spot traders on Wednesday and they agree. Carry as some desks say, is the proverbial king - if you believe foreign currency forwards two years from now.
If you ask me Carry is less king, more wannabe prince.
There’s no doubt about it, risks are firmly to the downside despite China being able to manage its current squeeze, Australia needs iron ore consumption to increase further. A note on the USD leg - I thought this was simple. Markets and positioning are most definitely not. So what next for the pair?
Consolidation at the lows, along with both the US and Australian macro snap shot still gives me a broad bearish bias. However, swaps and carry from three months all the way out to the all important two year are looking unusually positive. If we break .7500 I’ll turn the lights out - along with my tentative but still bleak picture.
Back to the confusion. Have we formed a solid base with no more to go? Or are we just pausing half way down the Mariana Trench?
I’ll let you decide.
Here’s a chart.
AUD/USD 
Source: Bloomberg, 31 March 2017 to 18 July 2018
Note: yellow line - 200 DAY, white line - 100 DAY simple moving average
GBP/AUD - Bear
Brexit fever may have calmed down a touch but Northern Ireland still remains the key to the rather rusty lock, both of which will decide the future price. The recent base AUD has formed shines a rather lovely light on this pair. A bit like Sydney harbour at 6am!
I’m a sucker for a head and shoulders (technical description of the graph) so GBP is looking like a weak forgotten relative at a rather odd marriage. 1.7995 is the line in the beautiful sunlit sand. If this cracks, it’s over for me but I doubt it.
A picture tells a thousand words but this tells me one. Bear.
GBP weaker against the AUD.
GBP/AUD
Source: Bloomberg, 31 March 2017 to 18 July 2018
Note: yellow line - 200 DAY, white line - 100 DAY simple moving average
Glossary
Carry
A carry trade is a strategy in which an investor borrows money at a low interest rate in order to invest in an asset that is likely to provide a higher return. This strategy is very common in the foreign exchange market. Financial Times Lexicon
Head and shoulders
Head and Shoulders formation consists of a left shoulder, a head, and a right shoulder and a line drawn as the neckline. The left shoulder is formed at the end of an extensive move during which volume is noticeably high. After the peak of the left shoulder is formed, there is a subsequent reaction and prices slide down to a certain extent which generally occurs on low volume. The prices rally up to form the head with normal or heavy volume and subsequent reaction downward is accompanied with lesser volume. The right shoulder is formed when prices move up again but remain below the central peak called the Head and fall down nearly equal to the first valley between the left shoulder and the head or at least below the peak of the left shoulder. Volume is lesser in the right shoulder formation compared to the left shoulder and the head formation. A neckline is drawn across the bottoms of the left shoulder, the head and the right shoulder. When prices break through this neckline and keep on falling after forming the right shoulder, it is the ultimate confirmation of the completion of the Head and Shoulders Top formation. It is quite possible that prices pull back to touch the neckline before continuing their declining trend. Wikipedia