An account was created in oanda with a capital of US$100,000. We are required to use this capital to invest in AUD/USD.
Research are required to be done, so as to determine long or short position to be taken, during the first trading period (18-29 December 2017) and second trading period (1-12 January 2018).This report will cover the fundamental analysis and technical analysis used to support the decision. News on increase of commodities price, plunged in US treasury yield, Caixin PMI, employment rate in US were included to explain the derived of our decision, which is to take long position for both the trading period. Technical tools such as Elliot wave model and Ichimoku cloud were also included to explained our decision of taking long position.
Furthermore, through all these research and news analysis, we invested 100,000 units each on 21 december and 27 december 2017 and made a total profit of US$215.50 for first trading period 1. We also traded 500,000 units on 4 January 2018 and closed the position on the 5th working day, 11 January 2018, made a total profit of US$2,170 for second trading period.
2.0 Research, Trading and Analysis
Trading period 1
2.1 Fundamental Analysis
A news was released on 17 December 2017 by CNBC (refer to fig 1.0), stating that dollar has fell against several major currencies. It was said that this had occurred due to the concern of proposed US tax reformed having a major impact on economic growth. With the weakening of USD, investors would look for alternative investment source to store the value, in this case, Gold is the alternative. This results in increase demand for Gold, allowing its price to increase. On the other hand, Australia is the second largest producer of gold; hence Gold has a positive correlation with AUD. Therefore, this may result in the increase of AUD/USD.
On 21 December 2017, the Gold price was also forecasted to have a bullish sign (refer to fig 1.1),as it returned to test the support after it rallied on Wednesday. It was priced at $1267.The market is forecasted to reach $1275 level and $1300 to be the resistance. The short-term pull back is an opportunity to buy.
2.2 Technical Analysis
With the support of technical analysis with Ichimoku cloud (refer to fig 1.2), it shows an upwards moving trend above the Ichimoku Cloud which means that the currency pair may continue to have an upwards trend movement, reaching 0.7740. However, the upwards trend may be cancelled if the price break and fixes below 0.7570 and continue a downwards trend reaching 0.7470. Only if the pair is able to fix above 0.7690, the price will move upwards.
With factors mentioned above, it leads to the decision of taking a long position on 21 December 2017. 100,000 units of AUD/USD were bought at a dealing price of 0.76907 on that day. On 22 December 2017, profits had been made. However, it was predicted by that the price would go higher to 0.7740, therefore 50,000 units of AUD were sold at 0.77136 first, hoping that the remaining units will earn more profit. A few hours later, the price of AUD/USD had fall to 0.77109, afraid of losing more in the end of the day. We closed our position by selling the remaining 50,000 units of AUD at 0.77109. In total, we earned a profit of US$215.50.
2.3 Fundamental Analysis
On 27 December 2017, CNBC released a news regarding the slipped of US treasury yields slipped after a fall in consumer confidence. Consumer confidence fall from 17-year highs in November to 122.1 lower than the expected 128.1. This results in benchmark of 10 years treasury note to ticked lower to 2.423 percent while, the 30-year Treasury bond down at 2.753 percent. Supported by another news released on 27 December 2017 by dailyfx, it says that the Crude Oil, Gold Prices Soar with the plunge in the treasury yield. The drop in US dollar would again leads to gains for commodities. Therefore, resulting in further increase of Gold price and increase in crude oil price. As Australia trades largely in commodities, the further increase of gold price and crude oil price would result in increase of AUD/USD.
2.4 Technical Analysis
Again, supported by technical analysis (ref to fig 1.3), the Australian dollar has improved a bit during 22 December 2017, however due to the low trading volume did not have a large impact on the market. As the gold market is forecast to move higher which will result in the Australian dollar to move higher as they have a positive correlation. Ultimately, the 0.78 level above is resistance, and the 0.80 level above that is even more important to the market. This has been a fulcrum for the market over the last few decades, and going over the 0.80 level will be difficult to achieve. Alternately, if the currency pair is trading below 0.7650, the market will then break down to 0.75 which will result in the market collapsing at that point and reaching below 0.725. With research showing that the gold price will increase, which will also result in the Australian dollar to increase, hence holding a long position and anticipate for the price of gold and Australian dollar to increase would be a better strategy.
Therefore, 100,000 units of AUD/USD were bought at a dealing price of 0.77410 on 27 December 2017, once the market open from the festive season. Although only a profit of US$1 was earned but it was due to a mistake made by selling the units off accidentally. The rate of AUD/USD did go up to 0.78096 on 28 December 2017, which means that more profit could be made if the accident did not happen. (refer to fig 1.4)
Trading period 2
2.5 Fundamental Analysis
On 1st January 2018, China Caixin manufacturing Purchasing Managers’ Index (PMI) for December 2017 attain a four-month high at 51.5 which was well above the 50.6 in December forecasted by economists from Reuters. The reading above 50 indicates expansion, while below 50 indicates contraction. The composite index was recorded at 53.0 prior to 51.6 which was the best result since December 2016. The PMI was supported by the improved manufacturing and servicing sector and the stabilization of economic growth in 2017. Since China is Australia’s largest trading partner for its raw-material export, AUD will strengthen due to the knock-on effects (refer to Fig 2.0).
Gold price on 2nd January 2018 rose to 15-week high above $1,300 per ounce against the falling US Dollar at the start of the year. On 4th January 2018, gold price rise to $1,315 per ounce due to the announcement of US employers reducing 418,770 jobs in 2017, lowest since 1990, which caused the dip in US dollar. As a result, USD weaken and gold price (refer to Fig 2.1) increased which lead to AUD strengthening. Hence, AUD/USD will rise.
On 7th January 2018, Gold price dropped (refer to Fig 2.1) from 3-½ month high as US Dollar rise against euro and traders’ bet on the further increase in US interest rate after the release of US payroll data. This resulted in the decrease in gold price which lead to the strengthening of US Dollar. Hence, AUD/USD decreased.
However on 10th January 2018, US 2-year Treasury yield hits its highest level in 9 years at 1.985 percent (refer to Fig 2.2). With its 10-year yield hit 2.597 percent, its highest point since March and 30-year yield at 2.894 percent. Bond yields is inversely related to its prices. These were attributed to a report that China, the largest buyer of US sovereign bonds, could be slowing down or stopping its purchases. It is due to the US sovereign bonds being less attractive as compared to other assets. In addition, the trade tensions between China and US could also be a reason to slow down or stop the purchases. This had prompt a sell-off of US sovereign bond and force a rise in yield. Hence, USD dropped against most currencies. Thus, AUD/USD raised after the short decrease.
2.6 Technical Analysis
Technical analysis is the study of how prices behaved in traded markets through graphic form and price movement. As shown from the fig 2.3, AUD/USD is trading at 0.7847 and moving above the Ichimoku Cloud which means that it may continue going an upward trend. Ichimoku Cloud is an versatile indicator that identifies trend direction, support and resistance and price momentum. We should expect the price to test Kijun-Sen and Tenkan-Sen at 0.7830 and continue moving upward to reach 0.7930. However, if the price breaks the downside border of the cloud and fix below 0.7725, the expected upward trend might be cancelled and fall towards 0.7670.
As shown from fig 2.4, by using Elliott wave model AUD/USD shown a bullish zigzag started since the beginning of May 2017. Since wave A and B are completed, this indicate that AUD/USD will be moving towards wave C which indicate a bullish market. Based on Elliott Wave pattern, it shows that AUD/USD will be in the bullish trend in the first part of 2018.
With the support from the news and technical analysis shown above, 500,000 units of AUD were bought at trading price of 0.78349 on 4 January 2018 and sold off at 0.78783 on 11 January 2018, earning a profit of $2,170.
4.0 Conclusion & Recommendation
The research done above had shown the possibility of increase in AUD/USD. Therefore, a long position was taken at the 2 trading period. Indeed, the price of AUD/USD rise during both the trading period. Therefore, a total profit of US$ 2,385.50 was made during the first and second trading period, US$215.50 and US$ 2,170 respectively.
Through this project, it require us to use trading platform to conduct trades using a practise account which result in exposure to trading and gaining more knowledge regarding to trading. Using the platform enable us to learnt how to utilize the trading system such as recognizing the pips, how to buy and sell, and reading the prices in the chart. It was also realised that it is very important to check carefully on the amount keyed in before buying or selling.
Apart from the things learnt in the system, we also learned more on the factors that would affect AUD/USD and monitor them while doing our research. For example, the reason for the inverse relationship between USD and gold as they are a substitution of investment sources for each other.
We also learn about the different technical analysis tools and how to utilize them to see the price momentum such as Ichimoku Cloud and Elliott wave model.