The Australian dollar is higher as shorts get squeezed - what's next

Market Analysis /
Greg McKenna / 25 Jun 2018

Well, my question was answered pretty neatly Friday. 

The Aussie was building a base and did run higher with the Euro which continued its short squeeze recovery. Both the Aussie and Euro appear to have further upside as the USD loses some of its lustre.  

That's especially the case for the AUDUSD with the CFTC positioning data showing the big specs have a net short AUD of more than 45,000 contracts. That’s the biggest short since December 2015.

Click on me, I'll expand
Click on me, I'll expand

 

That level of shorts means the AUDUSD can run further of course. But rallies are likely to be offered unless the USD falls out of bed.  

And what are the chances of that? 

As I wrote in markets morning earlier dataflow is going to ultimately be important for the USD and whether the rally has stalled or ended. Of course, the reality of that is its all about the time frame the trader is playing in.

Short term the dollar is struggling, medium term the policy and economic divergence are likely to favour the US economy and the USD. And within those short and medium terms there will be tides, waves, and ripples. It’s really is all about the time frame you trade and getting in synch with those tides, waves, and ripples.

And in a slow news week the Aussie is going to be captive to that US dollar, to rhetoric on the trade war, to the reaction to the PBOC's RRR cut over the weekend, and to what that all means for risk sentiment and risk assets like stocks and the Aussie dollar. 

Source: Twitter Screenshot
Source: Twitter Screenshot

To that end Copper might be important too though. The Aussie has outperformed copper a little - will the Dr play catch up or will it lag and act as a handbrake on the AUDUSD move. 

Click on me, I'll expand
Click on me, I'll expand

Looking at the price action for AUDUSD then and Friday saw the almost perfect setup on the 4 hour charts with a run to 0.7450 a simple, garden variety, 38.2% retracement of the last leg lower and hold in the 0.7340 region. Where to now very much depends on what the USD does and on that front it also falls to the Euro which might have some further gains toward 1.1700/30. 

On the day 0.7445/50 is resistance then 0.7472/77 and then 0.7530/50. Support is 0.7416, 0.7398 and 0.7373.

Click on me, I'll expand
Click on me, I'll expand

Have a great day's trading.

Greg McKenna

Chief Market Strategist

gregmckenna.com.au

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