Look out for Aussie rate cut

I received a question on my blog last week, asking me to define the term "fair value".

In short, fair value is an estimate of a security's worth on the open market. Specific to the forex market, fair values do not hold much weight. If they did, the USD/JPY should be trading around 90 today. However, it hovers just shy of 78.

The reason fair values do not matter in the currency market is that some currencies carry the "safe haven" tag. This means that such currencies are preferred in times of economic turmoil, even though their related economies may be sputtering. Examples of safe-haven currencies include the United States dollar and the Japanese yen.

Fair values aside, there are other numbers which matter in currency trading. In fact, some of these recently released numbers are disconcerting, to say the least.

The MSCI Asia Pacific Index dropped 0.7 per cent just a few hours after opening yesterday, while futures on another global index, the Standard & Poor's (S&P) 500 Index, lost 0.4 per cent.

The S&P 500 lost 1.3 per cent for the entire week, the worst performance since June.

In the US, last week's figures were dismal as well. Core durable goods came in at -1.6 per cent, a figure worse than that of the previous month. Pending home sales were reported at -2.6 per cent from the previous month's.

US Treasuries, meanwhile, saw a three-month return of 0.58 per cent, the second straight advance. This tells us that traders and investors are flocking to the safety of US government debt. In Europe, sentiment on the euro is fast turning bearish.

In Asia, China's purchasing managers' index reading for last month came in at 49.8. A reading below 50 indicates a contraction.

With dismal numbers being reported from the US to Europe and Asia, it is clear that lacklustre demand is hampering global growth. No wonder governments are - yet again - scrambling to inject unprecedented amounts of liquidity into the financial system.

Top News This Week

The US: Non-farm payrolls on Friday. I expect the figure to come in below 120,000 (previous figure was 96,000).

Trade Call

Short AUD/USD at 1.0327

With global demand falling everywhere, there is a good chance that the central bank of Australia may cut interest rates by 25 basis points to 3.25 per cent.

On the four-hour chart, a support level on the AUD/USD is spotted at 1.0331. If the Reserve Bank of Australia does implement a cut and prices start to fall, we will enter for a short once prices close below the support level.

Entry is taken at 1.0327, four pips below the support level, and a stop loss of 50 pips is placed. We will have two targets on this trade, with the first position taking profit at 1.0277 and the second position taking profit at 1.0227.

Entry Price=1.0327

Stop Loss=1.0377

1st Profit =1.0277

2nd Profit=1.0227

myp@sph.com.sg