More Downside as Carry Trade Continues

The AUD/USD pair pulled back sharply as a carry trade opportunity emerged. It dropped below the key support level at 0.6683, the lowest level on January 4. It was also the lowest level last week. 

• Sell the AUD/USD pair and set a take-profit at 0.6500.
• Add a stop-loss at 0.6685.
• Timeline: 1-2 days.

• Set a buy-stop at 0.6645 and a take-profit at 0.6750.
• Add a stop-loss at 0.6550.

The Australian dollar retreated to the lowest level in months as a divergence between the Federal Reserve and Reserve Bank of Australia (RBA) emerged. The AUD/USD price crashed below the key support level at 0.6600. Aussie also dropped against other currencies like the New Zealand dollar and the euro.

A divergence in monetary policy has emerged between the Federal Reserve and the RBA. In its meeting this month, the RBA hiked rates by 0.25% as was widely expected. In his statement, Philip Lowe hinted that the bank was nearing its peak of hiking. He said that future rate hikes will depend on inflation, business sentiment, and jobs.

On the other hand, the Fed maintained its hawkish tone. In a statement on Tuesday, Jerome Powell said that the bank could continue hiking interest rates in the coming months. As a result, most analysts believe that the Fed could hike rates by 0.50% in March.

In a statement on Wednesday, he tried to walk those comments back by saying that the bank will focus on the upcoming data. Some of the key numbers to watch will be the upcoming non-farm payrolls (NFP) and consumer and producer price index data. Powell said:

“If — and I stress that no decision has been made on this — but if the totality of the data were to indicate that faster tightening is warranted, we’d be prepared to increase the pace of rate hikes.”

The same view was shared by Richmond Fed’s Thomas Barkin, who said that he supported more rate hikes. He believes that the bank has more work to do to achieve the target of 2%. Other Fed officials like Loretta Mester and James Bullard have also supported higher rates.

The AUD/USD pair pulled back sharply as a carry trade opportunity emerged. It dropped below the key support level at 0.6683, the lowest level on January 4. It was also the lowest level last week. The pair dropped below all moving averages. Oscillators like the MACD and the Stochastic Oscillator continued falling.

The Average Directional Index (ADX), measures the strength of a trend that continued rising and is above 40. Therefore, the pair will likely continue falling, with the next key support level to watch being at 0.6500. The stop-loss of this trade will be at 0.6683.