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AUDCHF Trade Idea (Sept, 2020) AUD SELL OFF OR CHINA DRIVEN BREAKOUT?

You’re probably sick and tired of the on going news and talks regarding the pandemic. However, it’s still an underlying risk on global economic growth. More importantly, it has a huge impact on the fiscal and monetary response from different countries. Australia for example has stated that they’re looking to ease lending. What does this mean?

Easing of lending would allow people to borrow more easily. More specifically the Australian Government wants to “roll back standards”[1] on credit. More specifically what they’re trying to achieve is transferring due diligence responsibilities from the lender to the borrower so they can now lend based on information given from borrower instead of having to do an independent investigation.

What impact does credit have on economies? Credit is a direct driver of money supply, when credit is made easily available it looks to stimulate the economy with more spending through cheaper credit. This means more money will be in supply in circulation, more supply does what to price? More supply decrease the value and price. Overall, this easing will help stimulate the economy by creating inflation and increasing money supply and thus devaluing the Australian Dollar.


This week’s currency strength meter had some very interesting points to build upon the credit issues I mentioned where the EUR indicator and the CHF have shown a straight cross over in favour of CHF. This potentially suggests a future AUD/CHF downwards trend potentially building up. What we’ve seen in the indicator is a strong AUD downwards movement since 29/08/2020 but during the same time CHF has increased over 50 points. This crossover in the indicator suggests to us as professional traders we should be focusing on AUDCHF moving forwards in the next couple months and keeping an eye on it.


Gross Domestic Product Analysis

One of our brand new indicators for our traders is the GDP differential tool, speeding up the analysis for traders by skipping the copying and pasting of data and just quickly glancing at the indicator to get a result. Some interesting points about this is that currently the differentials are in favour of AUD which goes against our idea right now as in 2021 it is forecast that AUD should be looking for a recovery potentially driven by China’s demand on commodities. Overall, we’ll need to assess the other economic factors to see in the end will we have a short bias to agree with our currency strength meter/ indicator.


AUDCHF COAL AAL Comparison

“Anglo American PLC is a mining company. The Company has a portfolio of mining operations and undeveloped resources with a focus on diamonds, copper, platinum group metals (PGMs), and bulk commodities. Its segments include De Beers, Platinum Group Metals, Copper, Iron Ore, Nickel and Manganese, Coal, and Corporate and other. De Beers segment is engaged in the diamond business. Within the Platinum Group Metals segment, it has operations principally located in the Bushveld Complex in South Africa. It holds interests in two copper mines: Los Bronces and Collahuasi in Chile and is developing the Quellaveco mine in Peru. Its iron ore operations provide customers with iron content ore through assets in Brazil and South Africa. It has metallurgical coal assets in Australia, and thermal coal assets in Colombia and South Africa.”[2]

Mentioned in previous analysis articles coal is a huge commodity that Australia exports across the world. China was one of the major buyers of Australian coal but in the recent years they’ve started to become more renewable energy which has decreased this demand.

The AUDCHF relationship with coal is very interesting. Over the past 10 years we’ve seen over 55% positive correlation which has started seeing leading signs in the past few months of a downwards move. If this continues we’ll be super confident of the AUDCHF downwards trend to continue.


AUDCHF vs Iron Ore Analysis

There’s no surprise that we’ve included Iron ore too as the commodity floating currency AUD has very volatile price swings based on the price on its major exports. What we’ve seen since 2010 and 2015 is that as Iron ore prices continued to fall the AUDCHF exchange rate took the same directional dip. The rebound also followed suit however recent we’ve seen iron ore prices hit major highs, we may see a pullback moving forwards which could trigger a downtrend in AUCHF again.


AUDCHF vs Gold Analysis

Finally the last commodity within the analysis is Gold. There was around a 20% correlation over the period of 10 years but due to the pandemic we’ve seen gold take a massive bullish run over the few months in 2020. However, very interestingly gold has peaked at 2,000 seeing a big pullback on prices in the past month Gold prices have dropped around 6% so following that positive relationship we could further assume AUDCHF may see a downwards dip moving forwards too.


Interest Rate Differentials Analysis

The interest rates have also been following a similar trend we’ve seen in the exchange rates and that’s going down. The interest rates were at a strong differential in favour of Australia at 3% but has dropped now by 2% over the past 5 years. This is likely to continue as the RBA continues to cut rates to stimulate the economy through the pandemic. This is very inflationary overall as an indicator as Australia tries to make credit more affordable. The indicator overall is agreeing with our short idea and moving ahead in 2020 I can personally see this AUDCHF position dropping further.


S&P/ASX200 (CHF) vs AUDCHF

Overall the S&P/ASX200 saw all-time highs hit at 11,000 (CHF) however since that high in the new year we saw the pandemic cause a huge drop in the value of the index. Since then we’ve seen a 13% decrease which is super bad overall for Australian wealth. Again, the economic indicator seems to be ageing with our idea.

What we need to do now is take into account the market sentiment and technical prices.


Commitment of Traders Positioning

Overall, the analysis regarding commitment of traders we’re at a neutral position. This is because AUD and CHF are both being bought on a hedge fund level with the CHF having slightly more positions. So overall, we’re at a neutral stage on the COT so we’ll need to check the technical to see if there’s convincing signs overall of a short.


Technical Analysis – Weekly & Daily Levels

On the weekly levels on AUDCHF we’ve already identified a really strong down trend. So what do we want to be doing? We don’t want to be buying into it really. We want to get in on the trend and ride it out. Very bearish signs have shown in the past week with AUDCHF dropping with a large bearish engulfing candle.

On the daily time frame I’ve identified an important level in the red box. This should be broken to really show confidence that sellers have full control over AUDCHF. Until this we’re still unsure whether if the pair is in a consolidation or not.


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