As we come to the end of another trading week, for the Australian dollar it has been another characterized by negative sentiment with the AUD/USD likely to close with a wide spread down candle, with the bearish tone picking up momentum once again. The move lower for the pair is of no great surprise given the clear and unequivocal messages that have been emanating recently from the RBA, during the course of which the bank has made it abundantly clear, that a weak currency is to be welcomed in the short term.

But perhaps more importantly, it has not been so much the tone which has surprised the markets, but the direct way in which the exchange rate has come into focus. The content and tone were ones more generally associated with central banks where overt intervention is the norm, such as the BOJ and the SNB. For the RBA this was a move away from the ‘norm’ with the markets reacting accordingly, and duly obliging with further weakness in the currency. The trigger this week were the comments from Deputy Governor Philip Lowe who stated:

My judgement would be that if further interest rate reductions were required, they would have some effect in stimulating economic activity.”

In addition to the above comments, the interest rate cut in China, which surprised the markets, also had a knock on effect in terms of the Australian dollar with the potential slowdown in demand for base commodities such as iron ore, a staple export of the Australian economy.

From a technical perspective, the outlook looks increasingly bearish, and with the extended congestion phase of the last few weeks now apparently drawing to a close, this week’s wide spread down candle looks set to be the trigger for some further falls. The key level has been the deep region of price support in the 0.8722 region, which has now been firmly breached with the pair trading at 0.8504 at the time of writing, all confirmed with rising volumes both under the price waterfall of September/October, and more recently in the down candles of November.

Moving to the daily currency strength indicator to the left of the chart, here we can see the Aussie dollar (the blue line) is continuing to decline and has some way to go before reaching an oversold position in this time frame. To the top of the indicator, the US dollar the red line, is now approaching the over bought region, but again, with some further room to develop deeper into this region. Finally, whilst the CFTC data has shown a small reduction in the number of shorts, the overall position for the Aussie remains heavily bearish in the futures positions.

Overall some nice trading opportunities in the short to medium term, with the technical, fundamental and relational aspects all acting in concert.

Editor’s Note: Equity investors/traders can use the Currency Shares Australian Dollar Trust (FXA, quote) ETF to take positions in the Aussie dollar without a FOREX account.  The ETF looks to track the price of the Aussie dollar (AUDUSD), minus ETF fee. The fund seeks to reflect the price of the Aussie dollar (AUDUSD) with the shares representing a cost-effective investment relative to investing in the FOREX market.

Anna Coulling is a trader with over 16 years’ experience and founder of AnnaCoulling.com

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