AUDUSD remains constrained by its lower highs, a trend that began this month. There is still support just above the 0.9100 level; however the price action suggests that this support will be broken. The pair has been trading in a large range over the last six months. The lack of interest rate movement out of the Fed will likely contain the pair to this range.

The return to the bottom of the range around 0.8600 will most likely be triggered by a signal from the RBA that they will be holding rates steady. As long as they continue on their rate hiking cycle, the pair should be bolstered to the top of the range. There is strong profit potential for an AUDUSD sell, this would be a long term trade, with a larger stop loss above the recent highs around 0.9370 that would target a return to the 0.8600 level. This trade should be exited if either the Fed or RBA signal imminent rate hikes.

Down Trending Highs In AUDUSD

With the release of their monetary policy statement today, Canada has entered a transition phase in-between the current lose money policy and the imminent tightening policy. Looking at the remarks in their statement, I do not believe that we will see a rate hike in their next decision on June 1^st. However, there will be rate hikes to come after that.

Being the forward looking mechanism that it is, the market has already begun to price in these rate hikes. Just how much farther will USDCAD fall based on these rate hikes alone?

Don’t forget that right now it seems like the Fed will not be hiking rates until next year so we could see a good six months of significant yield advantage of CAD over USD, if not longer. So, these rate hikes will certainly give a downward pressure on the pair. A return to the pairs low around 0.9000 seems all but certain at this point. And, it looks like the parity mark will switch from support to resistance during this period.

Overall USDCAD has the makings of a strong sell, although a pullback to 1.1000 is highly likely. Long term there is strong resistance above 1.3000, that has been tested and held sever times in the last few years. CAD will also be strengthened by the rising price in oil, which is inching ever closer back to $100.

So, the Reserve Bank of Australia, raised rates again, no surprise there. And in their statement that began and ended almost exactly the same as their last one, it was implied that they will be hiking them again in the future. They ended with the statement that they would be bringing interest rates back to their average levels and that this rate hike was “a further step in that process”.

There was some talk about the housing market in their statement, however at this point it doesn’t look like it will halt future rate hikes, but watch the housing data for a significant move toward weakness in the market. If this begins to falter then so do the odds of a rate increase.

Looking at the charts, AUDUSD has been pushing up on the high from March 17^th. If it can break past here it would face some considerable resistance around 0.9310. Despite pushing up on resistance, don’t forget that AUDUSD has been in a down trend since last November. So if the pair falters at the current level expect a return to support at 0.8600. The largest risk to AUDUSD strength is rate hikes out of the Federal Reserve, which are expected to come this year, as early as this summer.

In the yen pairs, AUDJPY has been the strongest pair. It bounced off of 86.18, which was the high from January 11^th. The benefit of trading AUDJPY over AUDUSD is that rate hikes in the US would be beneficial to AUDJPY. So, you can still play AUD strength without fearing an increase in dollar strength.

Last week EURJPY broke above resistance around 127.20, but failed to maintain that level and has since fallen back below it. The up trend that began on March 22nd has turned into consolidation in April, ranging between 127.90 and 126.75. If the pair can break below 126.75 the next support level is around 125.30, which was a previous resistance level. If we see a topside break and 127.20 forms support, look for resistance to form around 129 and 131.40 above that.

The movement in the yen pairs has been strange today, with respect to US equities. Typically EURJPY moves in lock step with the S&P. But today, positive movement in equities has been met with falling yen pairs. Read more about my longer term outlook on the carry trade.

Go ahead and open up your EURUSD chart and take a look. EURUSD has been constantly ignoring 1.3500. Look back to the beginning of February and you will notice that the bottom of the range is 1.3440 with the top at 1.3840. So will EURUSD be breaking out of this range? I don’t think so. There just hasn’t been a strong enough fundamental catalyst to break it out of its current range.

I would much rather be in a EURUSD buy than sell at this point. The movement within the range however has not been that smooth. I wouldn’t want to hang onto EURUSD past 1.3650. Lately EURUSD has not been following the equities market too well, mainly because of the issues with Greece. They have affected the Euro much more than the US markets so there has been a strong disconnect as of late.

AUDUSD broke through resistance at 0.9200 today, which had held up to two tests over the last week. This break has been fueled by a weakening US dollar more than a strengthening Australian dollar. The FOMC statement was mildly better than recent ones, with hints that the Fed will begin to ease off the liquidity injections, but keep rates depressed. The implication is for improving financial markets, and a return to growth. This is the same sentiment that we have been getting for the last year and a half, but you shouldn’t be too concerned with the legitimacy of the statement, unless you are trading very long term.

For most of you, your concern is whether the market will believe this sentiment again. History has shown us that it will. Despite the lack of actual change in the underlying fundamentals, the markets have shown that they can look like recovery has taken hold. So the market looks like it is going to run with this bout of risk appetite once again.

AUDUSD has resistance at 0.9300, limiting the topside movement to 100 pips, which is still a good potential for profit. I expect the pair to begin to bounce between 0.9200 and 0.9300 like it did in January, good news for anyone who likes to trade a loose range.

The euro is definitely deserving of its nickname of the anti-dollar. The market never seems to favor both at the same time. So the question you must ask yourself as well is: Is time to sell the dollar? To do this I will look at USDCHF as it correlates to EURUSD (EURUSD and USDCHF have a historically strong negative correlation). Now, I am not suggesting a correlated trade, but rather looking at a correlated currency pair to give you a different perspective.

Take a look at EURUSD on a H1 timeframe. Originally I saw two consecutively broken triangles with momentum moving up, so I looked to USDCHF to see if I could see a similar movement. This confirmed what I saw in EURUSD with one exception; USDCHF was traveling in a downward channel and was nearing the bottom. So I looked back to EURUSD and saw this channel as well and it was nearing the top of its channel.

Looking at USDCHF told me two important things. First, that EURUSD was moving in a channel, and that this was not an optimal time to buy. Optimally you should wait until EURUSD is at the top of its channel (USDCHF will be at the bottom of its channel) before you buy it. This gives you a better price and puts EURUSD closer to support giving you a higher potential for profit.

In the chart below I have marked what I originally saw in red, and what USDCHF helped me see in blue.

Traders often times look to correlations in order to attempt to make some kind of hedge that will guarantee profit. This is not the purpose of studying correlations. What correlations do is give you a different perspective on a currency pair that will show you what you didn’t see in the original pair. Remember that without potential for loss there is not potential for profit.

Last week I wrote a trading plan for a long term USDCAD buy. Since then the pair has weakened back down to the support line near 1.02.  The fundamentals have not changed, so I still stand by my call, and believe that this is the opportunity to enter in this long term trade. The trade should be entered in at low risk since the potential for the pair is over 450 pips.

Think back to when you were a kid and got one of those super bouncy balls you loved. You would chuck it at the ground and watch it hit the ceiling a few times before it veered off and broke your mom’s favorite vase. The Forex market is like that, except that it picks up energy as it bounces and breaks the floor or ceiling.

Take a look at EURUSD on a one hour chart. Do you see what I mean? It broke the ceiling that had been forming over the last month. Not only that, but the floor at 1.3445 has held for three bounces. Now, you may be asking “What about Greece?” Unless you think that more information is going to come out, it’s been fully priced into EURUSD, meaning that for now it is biased toward strength. This is primarily a technical move, and would only last for the short to medium term. For the long term I am bearish on the pair based purely on fundamentals, but the market does not move on fundamentals alone.

Now, I am a firm follower of the correlation between the EUR and the S&P. Looking at the stock index I believe we will get to 1200, which will strengthen the EUR. The difficulty is to say where EURUSD will top out. The two numbers I am looking at for the topside are 1.3800 and 1.4000, the two tops that have formed over the last month and a half.

If EURUSD does break below the floor at 1.3445 I don’t see it being able to recover from that point easily so this would make a good stop loss level.

Don’t you miss the glory days of the carry trade? Just buy a currency with a high interest rate, and sell one with a low interest rate and just watch your account grow, but then around the world interest rates zoomed toward zero. The Forex market lost its compass.

Now we are here waiting around for the next move: raising interest rates. The first one out of the gate was AUD, and yesterday RBA governor Stevens implied further rate hikes, although he was vague on the timing. This pause has given pause to any AUD strength that would have resulted from the interest rate increase. We also know that Japan will not be raising its rates anytime soon; even when interest rates were at the heights of a few years ago, Japan was under 1%.

Yes, I am suggesting buying AUDJPY in a carry trade strategy. Of course, the other yen pairs would follow suit, but AUD has that high yield attracting risk hungry investors. And while EUR has a large volume of shorts in it, this will most likely only result in on e spike and not the long term growth in the AUD, which is the goal of a carry trade.

Technically, 77 provides a strong support and has proven it over the last six months. The top side resistance is above 85 and the pair currently sits above 80. In case you don’t remember how to manage a carry trade (after all it’s been so long since the Forex market presented a carry trade), the goal here is to slowly grow your position as you move into profit. Increasing your growth potential and the amount of interest you can collect in your trade.