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AUDCHF Long Trade Idea (Feb, 2021) China Fuelled Recovery?

Updated: Mar 28, 2021

Much like the rest of the world, Australia is on its way to recovering from the COVID-19 pandemic. Having the luxury of being on an Island and easily able to close the borders they've been able to keep infections low.

One key political issue that Australia needs to deal with is various countries in the world signing up to the Paris Agreement. Since Australia is a global exporter of raw commodities such as Coal, Iron ore and the likes of Gold it also is correlated to fossil fuels.

The demand for fossil fuels is very likely to fall over the next 30 years as countries aim to reduce their carbon footprint or face a heavy fine.

Australia are already adapting... but will they be able to recover like the 2008 recession with China's support again?

Fundamental Technology Summary - LONG BIAS

New look, who dis... the Logikfx Technology has updated, we've got a brand new look to give our traders unique fundamental insights to the forex market.

What we've got at the very top is Macro Currency Strength meter here we have a fundamental directional bias based on the domestic economic performance of a country. We can clearly see AUD economy strengthening on a domestic basis and Switzerland maintaining a weak score. This deviation is a great indication that Australia will outgrow Switzerland creating a bullish outlook on AUDCHF.

The rest of the macro economic indicators are also looking very interesting for the long. The major ones being GDP differentials and Interest Rate Differentials. These two indicators and economic numbers are further fuelling a bullish outlook agreeing with our directional bias from the currency strength meter.

Finally, the commitment of traders COT hedge fund positions are not agreeing with the idea. This means we'd be currently trading against the markets "big money".

Overall... the long position looks interesting and it's definitely going on my watchlist.

Gross Domestic Product Differentials

Simple answer? GDP is forecast by the IMF in 2022 that Australia will outgrow Switzerland by 1.3%... that's bullish. That's the reason why the GDP differential technology was agreeing with the AUDCHF bullish bias.

Import/ Export Analysis

We're once again analysing the Australian economy and once again we need to consider the most traded, exported and mined commodities in Australia. Coal is one of those commodities that traders need to consider when trading the Australian Dollar. It has a strong positive correlation and considering the most recent growth has abnormal gains...we can expect an upside move in AUDCHF too.

After the distribution analysis that I've done on excel we can work out that the insane recent growth should be seen in AUDCHF. However, we need to get a holistic view of each commodity we're analysing.

Iron ore is another commodity which is a big exporter in Australia. The exponential growth shows that commodity prices are on the rise, Iron ore specifically. Iron ore is on the rise since 2015, who are the main buyers? CHINA.

Since the pandemic iron ore didn't really get affected... it's sky rocketed! To the moon! Haha, but realistically... the growth in combination with a positive correlation we can expect some serious upside movement. However, due to a small dip in the past month we currently have a neutral outlook on AUDCHF from an import/export point of view.

Gold is the final commodity I've chosen in the analysis, however, the correlation is fairly negligible over the past 10 years. Throughout, 2010 to 2018 the correlation held a strong positive number, however since 2019 a massive hike on gold has seen the relationship fall apart. So right now we're 50/50 and have a neutral bias of its effects on AUDCHF.

Interest Rate Differential - Hot Money Flow

The Interest Rates, we're back... traders are always keeping an eye on this macro indicator. One of the main drivers of currency value. What can we find out from the Interest rate indicator? The graph is showing that Australia has decreased their interest rates significantly, but, Switzerland have made their interest rates negative since 2014!

Imagine paying money for putting money in the bank...

Well, it seems this deviation, has created a bullish interest rate outlook on AUDCHF. Australian dollars will yield more than the Swiss Franc and in turn pumping up the value of the AUD!

Australia Stock Market Performance (S&P/ASX200)

Although Australia was one of the countries which was impacted the least domestically, their stock markets were hit quite hard and have since yet to recover. Why would that be? Well, considering they're a net exporter a lot of their business comes from around the world. What is the rest of the world doing? They're closing their borders, not letting people in and buying less. This hurts demand on Australian products and thus the stock market.

The stock market is growing... it's starting to climb steadily but yet to reach pre-pandemic levels. So, it's not yet agreeing with our AUDCHF idea.

The good thing is that the stock market is growing.

Commitment of Traders - Hedge Fund Positioning

The hedge fund positioning on the COT indicator is one of the indicators which wasn't agreeing with the trade idea. Why not? The overall net hedge fund open interest is negative meaning, hedge funds are buying more CHF than AUD.

What we'd want is a positive differential as overall this would mean there are more long positions in favour of AUD than CHF!

It might be a smart play to wait for this to line up...