It seems the debt-ceiling deadline snuck up on investors, as evidenced by Monday’s bearish start to the trading week. Many were quick to lock-in profits ahead of the potential government shutdown deadline. With major equity indexes oscillating for most of the day, it’s clear that uncertainty has once again permeated Wall Street, and investors’ confidence will be on edge until politicians can offer a resolution, or band-aid, over the coming days [see ETF Insider: New Defensive Position Added To Portfolio].
Our chart to watch for today is the CurrencyShares Australian Dollar Trust (FXA, A-), which may experience volatile trading at the opening bell as investors react to the overnight Reserve Bank of Australia interest rate decision. Analysts are largely expecting for policymakers overseas to hold rates steady at 2.50%, although the economic commentary after the rate decision itself can still inspire wild fluctuations in both the currency and equity markets.
Consider FXA’s one-year daily performance chart below. This currency ETF has endured a steep downtrend this year as policymakers started to cut interest rates in light of a sluggish domestic economy coupled with fears of further slowdown in China, which is Australia’s biggest trading partner in terms of both imports and exports. The Aussie dollar has shown signs of a trend reversal in recent weeks; notice how FXA rebounded off the $89 level twice in August, and has now managed to post a higher-low, assuming that it holds above $90 a share over the coming weeks [see also 3 ETF Trades To Make Before The Congress Showdown].
Furthermore, FXA has posted a higher-high for the first time since sinking below its 200-day moving average in April; notice how FXA has been able to snap its streak of lower-highs (red line) with its rally this month. Despite the attractive potential for upside, we advise conservative investors to remain on the sidelines here given the longer-term downtrend still at hand. For those looking to bet on the trend reversal, it is prudent to utilize a tight stop-loss in case of another leg lower [see How To Take Profits And Cut Losses When Trading ETFs].
If the latest economic outlook issued by RBA officials strikes an optimistic tone with investors, overseas equity markets and FXA should rally higher; in terms of upside, this ETF has upcoming resistance near $95-$96 a share. On the flip side, a worrisome outlook may inspire profit taking in the currency market for the Aussie dollar; in terms of downside, FXA has immediate support at $92 a share followed by the $89 level. As always, investors of all experience levels are advised to use stop-loss orders and practice disciplined profit-taking techniques.
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Disclosure: No positions at time of writing.