In my last scalp report on theUSD/CAD, we looked to play topside moves in the pair as risk sentiment came under pressure over European debt concerns and commodity prices fell. The Australian dollar has continued to track the risk-trade rather well and in this setup we look for the aussie to trend lower as global growth concerns now come into focus. The health of the Chinese economy has been called into question over the past few days as growth and inflation falter with consumer prices, producer prices, and industrial production data missing consensus estimates this month. Increased speculation that the government may look to ease further, after it reduced reserve requirements on banks last week, suggests that officials continue to see “severe” challenges to the global economy. As Australia’s number one trade partner, the aussie is likely to be especially hard hit as these concerns take root. Although this outlook should be considered on a longer-term basis, it’s likely that the ongoing crisis in Europe will also continue to weigh on broader market sentiment. Our medium term bias remains weighted to the downside, noting the risk of a continued relief rally in risk, with recent price action offering clear scalp targets.

AUD/USD Scalp Setup

Today’s rally in risk was certainly short-lived with equity markets quickly paring early gains. The aussie failed to hold above the 61.8% Fibonacci extension taken from the November 13th and December 8th crests at 9955 before drifting lower in afternoon trade in New York. Support profit targets are held at the 0.99-figure backed by the 76.4% extension at 0.9855 and our bottom limit at 0.9815. A break here risks substantial losses for the aussie with subsequent floors seen at 0.9775, 0.9740, and the 100% extension at 0.9695.

The pair continues to hold within the confines of a descending channel formation dating back to December 9th with a topside break undermining our bias. Interim resistance holds at the 61.8% extension at 0.9955 with subsequent ceiling eyed at 0.9985 and the 50% extension at 1.0035. A breach here negates our short-term bias with such a scenario eyeingresistance targets at 1.0080 and the 38.2% extension at1.0115. An hourly average true range of 36.41 yields profit targets of 27-30 pips depending on entry. ShouldATR pull back dramatically, adjust profit targets as needed to ensure more feasible scalps.

*Note that the scalp will not be active until a break below the 0.99-figure or a rebound off 0.9955 or subsequent resistance level withRSI conviction. We will remain flexible with our bias with a move passed our topside limit at 1.0035 eyeing topside targets. There is no data on tap for Australia for the remainder of the week and accordingly we will continue to watch broader market sentiment as markets react to headlines out of Europe.

Key Thresholds

---Written by Michael Boutros, Currency Analyst with DailyFX.com

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