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Australian Dollar Poised for Losses until These Factors Change

Australian Dollar Poised for Losses until These Factors Change

2014-09-16 15:40:00
David Rodriguez, Head of Product
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- Australian Dollar hits biggest weekly decline of the year

- Surge in selling and other key factors leave us focused on further weakness

- Staying below key technical levels favors selling the AUDUSD

The Australian Dollar has fallen sharply versus the US Dollar on a surge in trader volume. Why might the AUD continue onto fresh lows before making a meaningful recovery?

Traders sent the AUD/USD exchange rate to its lowest in six months, and FXCM Execution Desk data shows that total selling of the Australian Dollar reached its highest since November, 2013. A prominent FX clearer likewise reported a record in single-week AUD selling. Clearly many are participating in this move, and we believe this favors further weakness.

Australian Dollar at Largest Single-Week Decline on Year, Total Selling Surges to Largest on Year

Australian Dollar Poised for Losses until These Factors Change

Source: FXCM Trading Station Desktop, Prepared by David Rodriguez.

Taken in isolation these are strong signals, but we likewise see other signs that the Australian Dollar may continue to depreciate through the foreseeable future.

FX derivatives markets likewise show that traders are betting on/hedging against important Australian Dollar volatility. Across all important time horizons, AUDUSD volatility prices are at fresh multi-month highs and point to big moves. Correlations suggest that higher Implied Volatility levels may coincide with further AUD weakness.

Aussie Breaking Lower as Implied Volatility Prices Surge, Correlations Favor AUD Weakness

Australian Dollar Poised for Losses until These Factors Change

Data source: Bloomberg, Prepared by David Rodriguez

The sharp moves and shift towards selling are all the more remarkable when we consider that speculators were heavily long the Australian Dollar just a week ago. And though the data is delayed, the heavily one-sided positions warn that there remains plenty of scope for further selling.

Australian Dollar Positions were Heavily Long Heading into Recent Declines

Australian Dollar Poised for Losses until These Factors Change

Data source: Bloomberg, CFTC Commitment of Traders Data. Prepared by David Rodriguez

One key question remains: have the fundamental winds truly shifted in the US Dollar’s favor? A major factor behind Australian Dollar outperformance in the past year has been its yield advantage against the US Dollar and other currencies. Yet even there we see considerable risks to the Australian currency as that yield differential has shrunken considerably.

Australian Dollar’s Yield Advantage Continues to Shrink Considerably versus the US Dollar

Australian Dollar Poised for Losses until These Factors Change

Data source: Bloomberg, Prepared by David Rodriguez

The end result is straightforward enough: the Australian Dollar remains at risk of further weakness. Our Senior Technical Strategist highlights the fact that the AUDUSD trades at significant trendline support dating back to the post-financial crisis lows.

Australian Dollar Trades at Trendline Dating to Financial Crisis Lows

Australian Dollar Poised for Losses until These Factors Change

Source: FXCM Trading Station Desktop, Prepared by David Rodriguez.

A break below would nonetheless favor a larger decline towards year-to-date lows near $0.8660. Near-term resistance is seen at the confluence of the pair’s 52-week Simple Moving Average and congestion near $0.9200. Remaining below said level keeps our focus to the downside.

Follow future updates via e-mail on this author’s distribution list.

--- 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

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

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