Great Graphic: Aussie Tests Trendline

It is not that the Australian dollar is the weakest currency this
month. 
Its 0.4% decline puts it
among the better performers against the US dollar. However, it has fallen to a
new low for the year today.  The losses have carried to a trendline drawn
off of the early 2016 low near $0.6800. 

The trendline has been drawn on
this Great
Graphic
composed on Bloomberg.
  It is found today near $0.7625 and rises by about seven ticks (100ths
of a penny) a week. 

The Australian dollar has been firming this month until the second half
of last week.
  On April 19, it briefly traded above $0.7800 to reach
its best level in a month.  However, it reversed lower then and closed at
a 1 1/2 week low, recording what technicians refer to as a key reversal. 
The follow-through selling pressure stalled ahead of the weekend pushed it to
the shelf carved out in late March and early April.  The modest selling
pressure pushed below the shelf today and down to $0.7635.   

The driving consideration seems to be interest rates rather than
commodities.
  Over the last four sessions, as the Aussie has been sold, iron ore prices have risen, and
copper prices have risen for the past four weeks.  Australia, which
traditionally pays a premium to the US now is at a discount.  The discount
is more than 30 bp for two-year sovereign borrowing and offers 10 bp less than the US on 10-year
obligations.  Australia’s cash rate is set at 1.50% and is unlikely to
change this year.  The Fed funds target range is 1.50%-1.75% and is likely to rise another 50 or 75 bp this
year.  

Speculators in the futures market have become more bearish in recent
weeks.
  They have been mostly net long Aussie futures since early
January.  The speculators shifted to a net short position at the start of
April, and net short position of 10.2k contracts as of April 17 was the largest
since the very first week of the year.  

The pressure, though, is coming from long liquidation more than the
establishment of a larger gross short position.
  The bulls have cut
their long holdings for the past four weeks.  They are fallen from 53.8k contracts on March 20 to 29.8k as of
April 17.   The gross short position has fallen for the past two weeks
by a combined 5.2k contracts.  The 40k gross short position is about 3k smaller
than the end of March.   This
suggests that what can fuel the next leg down is the bears participating, not just after the withdrawal of the
bulls.  

The economic data are unlikely to change the macro views this week. 
First thing tomorrow, Australia reports Q1 CPI.  We would assess the
risk on the downside of the 0.5% median forecast.  More constructive may
be the terms of trade due in the middle of the week.   Export prices may
have accelerated 4% vs. 2.8% in Q4 17) while import price increases likely
slowed (1.2% vs. 2.0%).  The intraday technical readings are
stretched,
and the $0.7600 area is
likely to hold on the initial probe.  The lower Bollinger Band is found
near $0.7620 today.  Initial resistance is
seen
in the $0.7660-$0.7680 area. 

Disclaimer

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