This technical analyst says the risk of a short squeeze in the Australian dollar is growing

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  • The AUD/USD fell to its weakest level since February 2016 on Friday. However, it climbed sharply higher in the second half of the session, coinciding with reports that China’s central bank may step in to support the Chinese yuan.
  • Along with speculation over future actions of the PBoC, the new low in the AUD/USD was not confirmed by short and medium-term momentum indicators.
  • David Coloretti, Technical Analyst at The Markets Academy, says this increases the risk of a short squeeze in the AUD/USD in the short-term.

The risk of a short squeeze in the Australian dollar is increasing, according to David Coloretti, Technical Analyst at The Markets Academy.

Despite falling to .7021 in Asian trade on Friday, the lowest level since February 2016, Coloretti says the move was not backed up short- and medium-term momentum indicators, increasing the risk of profit-taking ahead.

“AUD/USD produced new 2018 lows in early October and again last week,” Coloretti says.

“Each of these new lows was accompanied by momentum failures in multiple daily momentum indicators, in addition to weekly momentum indicators not making new 2018 lows in October.

“Friday produced an impulsive spike from a new 2018 low into the weekly close implying that the new 2018 low of 0.7021 was a difficult level for AUD/USD to maintain.”

NAB

Colretti says that this “poses the short-term risk of a retest of the 50-day moving average at 0.7181”.

He adds a “close above 0.7181 would be required to confirm a more sustainable multi-week upswing”.

After plunging to .7021 in Asia last Friday, the AUD/USD screeched higher in the second half of the session, closing the day at .7094.

The move coincided with reports that China’s central bank, the PBoC, will “use its vast currency reserves to stop any precipitous fall” in the Chinese yuan, according to unnamed sources who spoke to Reuters.

The Australian dollar has been extremely sensitive to movements in the Chinese yuan this year, often moving in lockstep during period of heightened concern towards the Chinese economy.

If the PBoC was to lean against further weakness in the yuan by selling some of its foreign currency reserves, prior form suggests that too could act to support the Aussie dollar.

The AUD/USD currently buys .7102.

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