AUD/USD: Still some juice left in the short squeeze bottle?

<p>Markets have settled a bit from the abnormal excitement we saw in today’s Asian session, but one move that looks like it’s here to stay […]</p>

Markets have settled a bit from the abnormal excitement we saw in today’s Asian session, but one move that looks like it’s here to stay is the big overnight rally in AUD/USD.

The pair was boosted by a strong-than-expected monthly employment report Down Under. As my colleague Chris Tedder noted earlier today, the report showed that the Australian economy created 17.4k new jobs (including 11.5k full-time jobs), enough to drop the unemployment rate back to 6.2% after last month’s surprise spike to 6.3%. While there are still plenty of longer-term concerns for Australia, the better-than-anticipated jobs report suggests that the economy may be stabilizing, at least relative to the rock-bottom expectations of many traders.

Turning our attention to the chart, the recent rally looks like it may have further to run. At its core, technical analysis is about using historical patterns and tendencies to help anticipate future movements in the market. With that in mind, it may be instructive to revisit the last two times AUD/USD has rallied within its recent bearish channel. Back in early June, the pair rallied about 250 pips over the course of 10 days before stalling out above .7800. Then, in early August, rates jumped 204 pips over seven days before turning back lower again.

Using these recent counter-trend moves as a guideline, we might expect the Aussie to again rally by about 200-250 pips over a 7-10 day period. As of writing, AUD/USD has only rallied about 180 pips over less than five days off last week’s bottom, so there’s certainly potential for more short-term strength.

The other technical indicators support a more constructive outlook as well. The pair looks likely to put in a large Bullish Engulfing Candle* today, signaling a big shift from selling to buying pressure. Meanwhile, the RSI is still rising after a brief dip in oversold territory, and the MACD indicator is about to cross back above its signal line, though its still well below the “0” level that delineates bullish and bearish momentum.

Overall, a move up toward the top of the bearish channel in the mid-.7100s could be in play over the next few trading days. That said, traders will soon turn their focus almost exclusively to Wednesday’s highly-anticipated FOMC meeting, where traders are split over whether the central bank will hike interest rates or leave them at the current subdued level for a bit longer. Ultimately, the Fed’s decision next week will likely determine whether the Aussie can break its bearish channel or whether it will revisit the 6-year lows around .6900 (or lower!) in the coming weeks.

*A Bullish Engulfing candle is formed when the candle breaks below the low of the previous time period before buyers step in and push rates up to close above the high of the previous time period. It indicates that the buyers have wrested control of the market from the sellers.

audusddaily9-10-2015 1-29-05 PMSource: City Index

Join our live webinars for the latest analysis and trading ideas. Register now

GAIN Capital UK Limited (trading as “City Index”) is an execution-only service provider. This material, whether or not it states any opinions, is for general information purposes only and it does not take into account your personal circumstances or objectives. This material has been prepared using the thoughts and opinions of the author and these may change. However, City Index does not plan to provide further updates to any material once published and it is not under any obligation to keep this material up to date. This material is short term in nature and may only relate to facts and circumstances existing at a specific time or day. Nothing in this material is (or should be considered to be) financial, investment, legal, tax or other advice and no reliance should be placed on it.

No opinion given in this material constitutes a recommendation by City Index or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person. The material has not been prepared in accordance with legal requirements designed to promote the independence of investment research. Although City Index is not specifically prevented from dealing before providing this material, City Index does not seek to take advantage of the material prior to its dissemination. This material is not intended for distribution to, or use by, any person in any country or jurisdiction where such distribution or use would be contrary to local law or regulation.

For further details see our full non-independent research disclaimer and quarterly summary.