And that means we’re bearish on most foreign currencies, which naturally take the other side of the USD exchange rate.
The problem with the Australian dollar is the country’s (too) close tie to China.
The Aussie dollar gained strength while China’s voracious appetite for commodity imports super-charged Australia’s economy. Now, a slowdown in China’s state-run construction boom threatens to knock the Aussie dollar back down to earth.
Harry recently explained the relationship between China and the Australian dollar. Read it here, if you haven’t already.
And back in June of last year, I shared a way to profit from the Australian dollar’s collapse. You can read my June 2013 alert here, to see the crystal-clear tactics I outlined for betting against the Aussie dollar.
Here’s an update on that trade:
We began writing about the toppy Australian dollar back in late 2011 and early 2012, as commodity prices had peaked and the Aussie dollar got itself stuck in a wedge pattern (the blue lines above).
But I didn’t jump right in. Instead, I waited for a bearish break below the support line of this pattern, then recommended short selling the AUD/USD pair below 94 cents.
Of course, it’s never prudent to enter a trade without a pre-defined exit plan. So, along with my recommendation to sell the Aussie dollar below 94 cents, I also recommended a stop-loss order at 99 cents and a profit target at 80 cents.
These levels gave us a reward-to-risk ratio of nearly 3-to-1, which means that we were positioning ourselves to earn roughly $3 in profits (if the trade worked out), while limiting our risk to just $1 (if it didn’t).
The trade is still open… hitting neither our stop loss nor profit-target levels.
That gives us an open profit of more than 400 pips, or roughly $4,000 per contract (standard 100,000 unit lot).
For now, stay the course. I’ll continue to keep you updated on this trade.