My Favorite Forex Trade: GBP/AUD

My favorite long term forex trade is short GBP/AUD. From both a technical and fundamental basis, the currency should be headed lower.

Based upon the recent trend of economic data including the highest level of unemployment in 12 years and the sharpest decline in retail sales since Feb 2009, the Bank of England should keep monetary policy easy for as long as possible. According to comments this morning, they seem to agree. BoE officials said their decision to leave their Quantitative Easing program unchanged was a close one – in fact some members actually favored increasing the program. Of all the major central banks, the BoE is the only one still considering more rather than less monetary stimulus and for that reason, the GBP should be headed lower. In fact, I think that the GBP will probably be the worst performing currency this quarter.

In contrast, the Reserve Bank of Australia intends to raise interest rates again in the near future. Last night’s comments from RBA Governor Battelino could not be more hawkish. He said the mining boom that is currently underway could last beyond 2020 and the boom is expected to lift investment and terms of trade more than in the past. He also believes that the growth potential of China and India suggests that the demand boom will also last longer. Therefore monetary policy needs to be extremely disciplined at this time because every past mining boom has fueled inflation. As a result, the rise in the Australian dollar is important because it helps to contain inflation. In other words, not only will the RBA raise interest rates again but they also want the Aussie to rise.

On a technical basis, moving averages are in perfect order meaning that the 10-day SMA is below the 20 which is below the 50 and 100. This usually foreshadows a new and major trend in a currency. On a shorter term basis, the GBPUSD is also trading deep within the Sell Zone territory according to my Bollinger Bands – all of which points to further losses:

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10 Comments

  1. My favourite trades since Monday 1 am were short AUD/JPY, USD/JPY and CAD/JPY, as the prices dived finely under moving averages on 1h charts. Some trades closed by TP, some by trailing SL, one have managed through that sweet drop today. But nobody will sympathize with my victories, which I won’t fuss about.

    As to AUD/GBP I couldn’t agree more. I don’t trade this pair and if I recall correctly GBP was slightly stronger today than AUD. I am not quite sure if AUD is the best choice as a partner for GBP shorting. At least for the near future. I will watch closely EUR/GBP though, because when the anti-Eurozone sentiment is over, EUR will be red hot to buy.

    Reply
  2. I have a large sum of GBP I want to exchange to AUD but as this is the worst exchange rate in 50years do I wait a bit longer or will it only get worse and not recover for many years? Do you see any improvement from the current AUD/GBP over the course of 2010 or will it stay on it’s current track?
    I have been waiting to receive this inheritance from the UK for 37 years and not sure how long I should wait before I should exchange.

    Reply
  3. Sorry, I probably shouldn’t have given so much detail as to why I want to know, could you just give your opinion on:
    “Do you see any improvement from the current AUD/GBP over the course of 2010 or do you think it will it stay on it’s current track?”
    Thanks

    Reply

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