Hedge Trade Will Protect Long Term AUDUSD Yield Seekers

The upward trajectory in the Australian Dollar has been guided by a trend line established in August of last year. The pair is driven higher by a widening yield differential between the two countries, with the RBA moving to contain inflation with record-high borrowing costs at 7.25% all the while the US Fed pushes on with rate cuts. The Australian economy has begun to slow under weight of hefty monetary tightening, but there are no signs that the RBA will pursue easing in the near term. This suggests the growth in yield spread between the two currencies is set to continue.

Having put in a top at 0.9500, AUDUSD tested there again shortly thereafter with a weaker, shallower run upward. A second rejection prompted a decline in price action to the trend line support level. From there, the pair’s ascent has been more measured, easing gently upward and working through various levels of intermediate resistance. Yesterday’s strong up move was stopped along a downward sloping resistance line formed by recent highs. We see AUDUSD retrace lower from here before the next up leg materializes.


Hedging Strategy

Currency Pair: AUDUSD

Long Term Bias: Bullish
Long Term Position: Holding Long (from 04/01 trend line test)

Short Term Bias: Bearish
Short Term Position: Short below 0.9380, Target 0.9140, Stop-Loss at 0.9480

Traders looking to protect their existing long AUDUSD position or enter long at a favorable price may consider a hedge short AUDUSD below 0.9380 with a target near trend line support at 0.9140. Once the profit target is hit, we expect the bullish trend to resume. We will maintain a stop-loss on our hedge position should AUDUSD break out to the upside prior to the limit being hit. We will set the stop-loss near 0.9480.