AUD USD Still some juice left in the short squeeze bottle

Markets have settled a bit from the abnormal excitement we saw in today’s Asian session, but one move that looks like it’s here to stay is the big overnight rally in AUD/USD.

The pair was boosted by a strong-than-expected monthly employment report Down Under. As my colleague Chris Tedder noted earlier today, the report showed that the Australian economy created 17.4k new jobs (including 11.5k full-time jobs), enough to drop the unemployment rate back to 6.2% after last month’s surprise spike to 6.3%. While there are still plenty of longer-term concerns for Australia, the better-than-anticipated jobs report suggests that the economy may be stabilizing, at least relative to the rock-bottom expectations of many traders.

Turning our attention to the chart, the recent rally looks like it may have further to run. At its core, technical analysis is about using historical patterns and tendencies to help anticipate future movements in the market. With that in mind, it may be instructive to revisit the last two times AUD/USD has rallied within its recent bearish channel. Back in early June, the pair rallied about 250 pips over the course of 10 days before stalling out above .7800. Then, in early August, rates jumped 204 pips over seven days before turning back lower again.

Using these recent counter-trend moves as a guideline, we might expect the Aussie to again rally by about 200-250 pips over a 7-10 day period. As of writing, AUD/USD has only rallied about 180 pips over less than five days off last week’s bottom, so there’s certainly potential for more short-term strength.

The other technical indicators support a more constructive outlook as well. The pair looks likely to put in a large Bullish Engulfing Candle* today, signaling a big shift from selling to buying pressure. Meanwhile, the RSI is still rising after a brief dip in oversold territory, and the MACD indicator is about to cross back above its signal line, though its still well below the “0” level that delineates bullish and bearish momentum.

Overall, a move up toward the top of the bearish channel in the mid-.7100s could be in play over the next few trading days. That said, traders will soon turn their focus almost exclusively to Wednesday’s highly-anticipated FOMC meeting, where traders are split over whether the central bank will hike interest rates or leave them at the current subdued level for a bit longer. Ultimately, the Fed’s decision next week will likely determine whether the Aussie can break its bearish channel or whether it will revisit the 6-year lows around .6900 (or lower!) in the coming weeks.

*A Bullish Engulfing candle is formed when the candle breaks below the low of the previous time period before buyers step in and push rates up to close above the high of the previous time period. It indicates that the buyers have wrested control of the market from the sellers.

Source: City Index