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The Australian Dollar has tumbled to fresh multi-month lows, but can it continue lower? Here are three key factors we’re watching.

1. A major technical break favors weakness into $0.9013.

2. Aussie Dollar correlation to gold prices leaves it at risk of further declines

3. One-sided retail FX positioning leaves our sentiment-based Momentum2 system steadily short.

Australian Dollar Sees No Significant Support until the Psychologically Important $0.9000 Mark

Forex_Australian_Dollar_eyes_Further_Declines_for_3_Reasons_body_AUDUSD.png, Australian Dollar Falling and May Continue Lower for 3 Reasons

Source: FXCM Trading Station Desktop, Prepared by David Rodriguez

1. Our Senior Technical Strategist has favored an Australian Dollar short position since 11/7, and a major technical pattern favors further weakness. He notes the lack of significant technical support until $0.9013-9069.

Correlation between Australian Dollar and Gold Prices Underlines AUD Sensitivity to Falling Commodity Prices

Forex_Australian_Dollar_eyes_Further_Declines_for_3_Reasons_body_Picture_6.png, Australian Dollar Falling and May Continue Lower for 3 Reasons

2. Beyond the Australian Dollar technical forecast, we note that the AUDUSD link to commodity prices leave it at risk of further weakness. Our Senior Technical Strategist notes that the next several days are critical to Gold prices, and indeed it will be important to watch whether XAUUSD weakness puts further pressure on the falling AUDUSD.

Gold Prices are Testing Important Technical Resistance and Remain at Risk for Further Weakness

Forex_Australian_Dollar_eyes_Further_Declines_for_3_Reasons_body_Picture_7.png, Australian Dollar Falling and May Continue Lower for 3 Reasons

Data source: Bloomberg

3. Heavily one-sided retail forex crowd sentiment has left our sentiment-based Momentum2 trading system to consistently sell into further weakness, and indeed current readings favor AUDUSD declines.

Forex crowds remain heavily long the Australian Dollar versus the US Dollar, favoring further weakness

Forex_Australian_Dollar_eyes_Further_Declines_for_3_Reasons_body_Picture_8.png, Australian Dollar Falling and May Continue Lower for 3 Reasons

Source: FXCM Execution Desk Data

Retail FX traders are now their most long the Australian Dollar versus its US namesake since it set a double bottom in September. Such one-sided sentiment warns that we’re at a potential sentiment extreme, but as long as crowds continue buying we’ll maintain our contrarian bias in favor of further weakness.

Follow any updates on the Australian Dollar via this author’s e-mail distribution list.

Forex Correlations Summary

View forex correlations to the S&P 500, S&P Volatility Index (VIX), Crude Oil Futures prices, US 2-Year Treasury Yields, and Spot Gold prices.

Forex_Australian_Dollar_eyes_Further_Declines_for_3_Reasons_body_Picture_9.png, Australian Dollar Falling and May Continue Lower for 3 Reasons

Data source: Bloomberg. Chart source: R SEE GUIDE ON READING THE ABOVE CHART

--- Written by David Rodriguez, Quantitative Strategist for DailyFX.com David specializes in automated trading strategies.

Find out more about our automated sentiment-based strategies on DailyFX PLUS.

Contact and follow David via Twitter: https://twitter.com/DRodriguezFX