In the absence of any market-moving data in the week ahead, the Aussie may take its cue from market risk sentiment and the technical structuring of the underlying market instead.
The commodity currency bloc has fallen notably over the past month with technical studies confirming the weekly and monthly charts offer further downside scope.
The Australian to US Dollar exchange rate has fallen from highs above 0.78 in April to the levels towards 0.7357 at present.
Much of the decline was inflicted by the Reserve Bank of Australia (RBA) who cut its base interest rates by 0.25% to 1.75% at its May 3 meeting and then took a knife to inflation forecasts days later.
Add to that the increasing possibility that the Federal Reserve might increase interest rates in June and it was have a fundamentally-based recipe for some major downside in the AUD/USD pair.
Due to the steepness of the fall, we would expect the pair to fall even further, with the next most significant target at 0.7262 where the 200-day moving average is situated.
This level is likely to break its fall, however, as it will attract a lot of counter-trend demand seeking to capitalise on the expected bounce.
Analyst Karen Jones, at Commerzbank, is of a similar opinion:
“We in fact favour a break lower to the 200-day ma at 0.7262, where we would expect to see some consolidation.”
The pair is currently trading at 0.7350, and it would have to break below key support, both from the S2 monthly pivot at 0.7347 and, according to Scotiabank’s Shaun Osborne the 50% Fibonacci Retracement and the 100-day MA which are both clustered in the 0.7330s.
Ideally, therefore, a move well below the 0.7330s would provide confirmation of a clean break, with a move below 0.7310 providing a probable ‘trigger’ signal for a move down to the 200-day MA at 0.7262.
However, not all analysts are so bearish. For example, Singaporean lender OUB’s Querk Ser Leang and Lee Sue Anne, are more cautiously negative as they see the pair as now too overstretched to the downside, to go much lower:
“Downward momentum is clearly waning and the risk for further weakness appears to be rather low. From here, allow for a retest of 0.7340 but 0.7300 is expected to hold for a recovery to 0.7410.”
Despite their fears, the RSI momentum indicator, remains above the 30 level indicating oversold extremes – at 34.
They comment on the thin event calendar in the week ahead for the pair, which means other global factors are more likely to dictate direction:
“With the economic calendar thinning out this week, we expect the pair to trade in tandem to global risk sentiment.”
If this is the case, however, the Aussie is more likely to fall even lower as gold is looking poised to break higher, especially following the spike in net Gold Long positions noted in the most recent commitment of traders’ (COT) report, which showed Gold buy positions rise from 220k to 271k in over a week. This sudden spike in demand appears to show investors positioning themselves for more uncertainty, not less, and this is likely to weigh on the Aussie, which tends to weaken during periods of risk aversion.
The gold data is further supported by Aussie COT positioning data which shows the number of Australian Dollar buy positions falling in the previous week and forming a bearish pivot on the charts (circled in red) which tends to be a fairly reliable signal of around 60% that the AUD/USD will weaken in the week ahead.