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Bearish AUD/USD On Extension Below 2-Year Trendline, Fundamental Divergence

Bearish AUD/USD On Extension Below 2-Year Trendline, Fundamental Divergence

Tyler Yell, CMT, Currency Strategist

Point to Establish Short Exposure: Pullback to 76.50 US cents per AUD

Spot: 75.60 US cents per AUD

Target 1:73.40 (May 8 low, 100% Fibonacci Extension)

Target 2: 71.45 US cents per AUD (May ’16 low, 138.2% Fibonacci Extension)

Invalidation Level: 78.19 US cents per AUD (50DMA)

If you are looking for a complete breakdown of the US Dollar, you may enjoy our popular USD forecast.

Stand to the side, the US Dollar is coming through, and it appears to be looking for vengeance. That’s the message traders are taking from the US Dollar’s quick move from worst to first in G10 FX in a move that can mainly be explained as a position shake out.

A week ago, the world was focused on the flattening US yield curve that would take us into an inversion where the US 10-year yields less than the US 2-year yield that tends to precede recessions. However, a bigger fear jumped on the scene in inflation that took the US 10-year yield above 3% for the first time since January 2014 and has taken the air out of US Dollar bulls.

The driver of the flattening yield curve in the US has been the US-2 year yield screaming higher as the Fed tightens while the 10-year yield has moved sideways for most of 2018 and lately higher at a glacial pace. Either way, you can see the US-year yield has had a key part to play in The vanishing AU yield premium to the US 2 year yield.

The Vanishing AU Yield Premium Has Dragged Down AUD/USD

Bearish AUD/USD On Extension Below 2-Year Trendline, Fundamental Divergence

Data source: Bloomberg

The vanishing premium can be seen as complementing the drop in AUD/USD on the chart above. What matters to traders is that the correlation has picked up the pace again at a time when the Fed is likely set to hike 4-5 more times yet the RBA remains on the fence about hiking at all.

Australia’s weak CPI also helped pave the way for a persistently patience RBA when the data released on Tuesday morning shows some of the downside risks presented to the economy. The RBA being slow to act could leave the AUD poorly positioned to benefit from any shifts higher in risk appetite. On the other hand, negative news flows could exacerbate AUD shocks to the downside.

Access our popular free trading guides to enhance your trading strategy here.

AUD/USD Chart with recent Ichimoku resistance honored at 78:

Bearish AUD/USD On Extension Below 2-Year Trendline, Fundamental Divergence

Chart created by Tyler Yell, CMT

The chart above shows an aggressive resumption of the downtrend after AUD/USD failed at the Ichimoku cloud. Such stubborn resistance in a noteworthy in and of itself, but when combined with the follow through the effect of causing AUD/USD to break below a 2-year trendline as the US Dollar continues to push higher should give traders enough motivation to keep a keen eye on whether this trend continues lower.

Currently, RSI(3) on AUD/USD and NZD/USD are the two lowest readings across nearly 30 currency pairs. This means that selling here can leave you ill-positioned for a bounce. Therefore, I would watch for a retracement to take shape toward the prior corrective move near 76.50 as a point for potential entry with a stop above the April high at 78.15. Downside targets on the chart are shown as 73.40 and 71.50 if an extended move higher in the US Dollar develops.

Short-Term Momentum Scorecard With AUD, NZD, NOK As Largest Losers

Bearish AUD/USD On Extension Below 2-Year Trendline, Fundamental Divergence

IG Client Sentiment Highlight:Australian Dollar Set to Fall on Bearish Bias

Bearish AUD/USD On Extension Below 2-Year Trendline, Fundamental Divergence

Per IG UK client sentiment on AUD/USD, retail trader data shows 68.1% of traders are net-long with the ratio of traders long to short at 2.14 to 1. The percentage of traders net-long is now its highest since Nov 17 when AUDUSD traded near 0.7563. The number of traders net-long is 1.2% higher than yesterday and 54.4% higher from last week, while the number of traders net-short is 4.0% lower than yesterday and 33.6% lower from last week.

We typically take a contrarian view to crowd sentiment, and the fact traders are net-long suggests AUDUSD prices may continue to fall. Traders are further net-long than yesterday and last week, and the combination of current sentiment and recent changes gives us a stronger AUDUSD-bearish contrarian trading bias(emphasis added.)

New to FX trading? No worries, we created this guide just for you.

---Written by Tyler Yell, CMT

Tyler Yell is a Chartered Market Technician. Tyler provides Technical analysis that is powered by fundamental factors on key markets as well as t1rading educational resources. Read more of Tyler’s Technical reports via his bio page.

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