Monday, 7 October 2013

GBP/AUD - How Did This Trade Get Away?

Ralph Shell, Excel Analyst

After a market has had a big run it all looks so simple.  If you had gotten aboard when the market had broken out to the upside and ridden the trend until the end you would have had a big winner.  But, sadly, the initial breakout proved false, and interest in the trade waned. Then the market resumed its primary trend higher, interrupted by profit-taking. 

The market I have been looking at is the forex chart of the GBP versus the AUD or GBPAUD. 

Going back to early April, the move has been from a low of 1.4410 to a high of 1.7450.  The daily chart suggests the high was made with twin tower candles August 21st and 22nd.  Since then, the market has been range bound, consolidating gains but unable to forge through into new high territory.

Trade in the week ending October 4th suggests the pound's big run versus the AUD may be over.  The weekly chart close was 1.6952. 

Click to Enlarge GBPAUD Currency Chart

Should the sell-off continue through the next support level of about 1.6820, we would then have a target all the way to 1.62.  Granted, there is no trade in the GBPUSD, myfxbook reporting their open inter in the trade is 0.0% of their total book, though it is 1.32 lots of shorts and .66 lots of longs.

This means we must look for guidance in the GBP and the AUD versus the USD.  At the beginning of April, the specs were not prepared for the advance in the pound; they started the period short 95.9K versus the USD. 

On that same April 9th report, the specs were long 91.8K of the A$.  The Aussie specs were caught totally wrong, and had to liquidate their long and get short.  The result was the run up in the pound versus the Aussie Dollar.

Last Friday's COT report showed specs had liquidated all but 41.6K of the A$, and had actually ended up long some of the 10.4K contracts of the pound.  We had hoped this week's COT report would provide clues of the amount of further liquidation, but this was too much for the 83% of those in the government still working.

In retrospect, it looks like the positioning in the respective markets was the set-up to exaggerate the move in the GBPAUD from the 1.44 to 1.74 handle.  This does not mean, however, that we are not entitled to a sell-off or a situation where you can sell at any price. Rather, it is  one in which we watch price behavior this week for an entry spot. 

A return to the 1.71 level - and then failure to hold, combined with soft market conditions - might be the catalyst for a break. 
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