Australian Dollar Might Continue Lower versus USD for 3 Key Reasons

David Rodriguez

These are the reasons we believe may send the AUDUSD lower:

1. The AUDUSD has seen a key technical failure

2. A strong correlation to US Treasury Yields and interest rates favors AUDUSD weakness

3. Extremely one-sided forex crowd sentiment has led our trading systems to sell AUDUSD

Australian Dollar Bounces Noticeably off of Multi-Month Lows, Fails at Key Resistance

forex_correlations_Australian_Dollar_May_Falter_for_3_Reasons_body_Picture_5.png, Australian Dollar Might Continue Lower versus USD for 3 Key Reasons
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forex_correlations_Australian_Dollar_May_Falter_for_3_Reasons_body_Picture_5.png, Australian Dollar Might Continue Lower versus USD for 3 Key Reasons

Source: FXCM Trading Station Desktop, Prepared by David Rodriguez

1. The mid-month Australian Dollar rally has failed almost exactly at the 61.8 percent Fibonacci retracement of the decline from November highs to lows, and the stop and reverse warns that upside momentum is failing. The pullback has coincided with an important shift in US Treasury Yields and general interest rates.

Correlation between Australian Dollar and US Treasury Yields warns of AUDUSD pullback

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forex_correlations_Australian_Dollar_May_Falter_for_3_Reasons_body_Picture_6.png, Australian Dollar Might Continue Lower versus USD for 3 Key Reasons

Why is the Australian Dollar so sensitive to interest rates? There are arguably several reasons, but the simplest is this: the AUD has boasted an important interest rate advantage against the US Dollar, and the significant pullback in said rate spread is an AUDUSD-negative. Its 10-year yield advantage hit as high as 2.75% in 2010 and now stands at 1.54%.

US Treasury Yields are bouncing off of key support, favoring USD strength/AUDUSD weakness

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forex_correlations_Australian_Dollar_May_Falter_for_3_Reasons_body_Picture_7.png, Australian Dollar Might Continue Lower versus USD for 3 Key Reasons

2. The fact that the US Treasury Yield has bounced at major support is a USD-positive and an Australian Dollar-negative. We’re likewise following significant shifts in trader sentiment.

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

forex_correlations_Australian_Dollar_May_Falter_for_3_Reasons_body_Picture_8.png, Australian Dollar Might Continue Lower versus USD for 3 Key Reasons
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forex_correlations_Australian_Dollar_May_Falter_for_3_Reasons_body_Picture_8.png, Australian Dollar Might Continue Lower versus USD for 3 Key Reasons

Source: FXCM Execution Desk Data

3. Retail forex traders remain heavily long the Australian Dollar versus the US Dollar, and our contrarian sentiment-based Momentum2 trading system has done well selling the Aussie Dollar versus the USD and Euro (long EURAUD).

It’s worth noting that long interest in the AUDUSD is off noticeably from recent peaks—total long orders have fallen 20 percent from just six days ago. Yet a strong majority of traders remain long, and as long as that remains true we remain in favor of Australian Dollar 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_correlations_Australian_Dollar_May_Falter_for_3_Reasons_body_Picture_9.png, Australian Dollar Might Continue Lower versus USD for 3 Key Reasons
forex_correlations_Australian_Dollar_May_Falter_for_3_Reasons_body_Picture_9.png, Australian Dollar Might Continue Lower versus USD for 3 Key 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

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