Aussie Remains Down Under

by on May 28, 2013 3:08 am BST

The Australian dollar is slightly lower in thin post-Memorial Day trading, but the question is whether it will remain down under. In previous analysis, I discussed the reasons why the Aussie dollar would continue to fall, and it was largely due to overvaluation based on a carry trade thesis as it ignored warning signs in the Australian economy. The abnormally bullish U.S. dollar this year has wrecked havoc on commodities, as well as a lack of industrial demand. The budget miss was also blamed on the very high Australian Dollar, and this has caused the RBA cut rates. The chickens came home to roost by dropping a mind-boggling 1,000 pips within the last month and breaking through any meaningful support.

In a previous currency report, a target of .9665 was accurately hit, but the question remains where the Aussie-dollar will head given it’s downright bearish but oversold location. When glancing at the daily chart, AUDUSD definitely has the opportunity to hit the second of three targets: .955. Although, I do expect a retracement from there. A triple bottom on the 2Y daily chart could muster enough bullish momentum for a decent size pullback. After reaching .955, a pullback to .9814-61 is very likely given the pairs price memory.

Australia has real estate-related data out the middle of this week which could end up in disappointment. However, I expect Aussie-dollar to head lower going into the data. Also, Chinese manufacturing PMI is out friday. The Chinese data points weigh heavy on Aussie, so it is very likely to trade lower or higher given the result. It is important to remain flexible incase the market’s expectations are not met.

Short-term outlook on AUDUSD is neutral with a long-term bearish outlook. I would not add to any existing positions until the direction and sentiment is reestablished. Look for .955 to cut legs off of shorts, if possible.