The AUD has been looking oversold against many currencies as the pair faces several long-term headwinds (economic weakness domestically and externally, falling commodity prices, slowing demand from China, a dovish RBA). Despite a long-term bearish outlook for the Aussie, we think that the recent weakness in the currency may experience a near-term correction before continuing lower.  At the same time, a shift in rhetoric from the ECB as it commits to low rates for an extended period of time is likely to weigh on the common currency.

The fundamentals combined with a technical breakout in EURAUD indicated that the pair may experience a correction to the downside.  Yesterday, EURAUD made a daily close below the 21-day simple moving average (SMA) for the first time since early April and the daily RSI indicator dipped below the 50 level for the first time since April as well. The base of a long-term bullish channel was breached and the pair looks to have formed a head & shoulders pattern which suggests a top is in place for now. While EURAUD remains below the 21-day SMA (currently around 1.4120) we expect continued downside with the 55-day SMA coming in just above the 1.35 figure as a key downside pivot.

Source: eSignal,