Aussie Awaits Stress Test, Inflation Data

Fundamentals

The Aussie Dollar has held up fairly well recently, but the currency now faces several tests. The Royal Bank of Australian (RBA) has not hinted toward a bias as far as tightening goes, but, will analyze the results of the European bank stress tests and domestic inflation data to determine whether to continue tightening or take a pause. The upcoming stress test results figure to have a fairly significant impact on growth currencies, like the Aussie. Positive results could lead to further risk taking, bolstering growth currencies, while negative results could result in traders flocking toward the relative safety of Yen and US Dollars. Given the commentary from Fed Chairman Bernanke yesterday, in which he stated that the outlook for the US economy was "unusually uncertain", negative stress test results may have an even larger impact on the Aussie than they would otherwise. Domestically, traders will be focused on next week's consumer price report. If the report shows tamer inflation, the RBA may be less inclined to raise interest rates, which could have a negative impact on the exchange rate of the Aussie. Positive stress test results and higher inflation could benefit the Aussie in the near-term, but gains in the currency could be limited by the uncertainty surrounding the global economy. Traders would like more clarity, good or bad, but it does not appear that clarity will be coming any time soon.

Trading Ideas

Traders are faced with uncertainty facing the Aussie, both fundamentally and technically. However there do seem to be some bullish undertones. The European bank stress tests were done to restore investor confidence, so the ECB may put a more favorable twist on the data. Technically, the Aussie has not signaled a new breakout, but prices are approaching resistance with a bit of momentum. The more conservative trader may wish to sit this one out until the market gives a clearer picture on direction. The more aggressive trader may wish to enter into a bull call spread, buying the September 88 call (ADU00.88C) and selling the September 90 calls (ADU00.9C) for a debit of 0.0100, or $1,000. The trade risks the premium paid for a potential profit of $1,000.

Technicals

The September Australian Dollar chart shows prices testing recent highs near the 0.8800 level. A breakout above this level could be the start of a new upswing in the Aussie, but the market may face more stout resistance at the 0.9000 level. Prices may also come up to test the 100 day moving average. Several solid closes above the average could be seen as bullish in the intermediate term. The RSI is approaching overbought levels, which could help act as a barrier for prices.

Rob Kurzatkowski, Trading Specialist