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Charts: Australian dollar faces test of key support

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Scott Barbour | Getty Images

A decline in global commodity prices and waning demand from China, Australia's largest trading partner, pushed the Australian dollar to fresh five-and-a-half year lows this week, and now the currency faces a test of key support.

The Australian dollar fell to $0.7870 on Monday, its weakest level since July 2009. It's now testing the technical support level near $0.79; minor falls below this level are consistent with consolidation behavior.

The Aussie became less attractive as a weakening economy and expectations for an eventual Federal Reserve rate hike pushed it below parity with the U.S. dollar in mid-2013. Expectations that the Fed will hike rates in 2015 have since destroyed the carry trade, with the Aussie reverting back to a commodity currency.

Over the past few years the Australian dollar has moved between broad trading bands defined by support and resistance levels. These bands provide a method to set the potential downside targets for the move below $0.8650.

The weekly AUD/USD chart shows a strong support level near $1.0150. This level was broken in May 2013. The Australian dollar then tested support near $0.94. The width of the trading band between $0.94 and $1.015 was projected down to give the downside support target near $0.865. The fall below support at $0.865 was a critical move that showed a failure of a double bottom support pattern.

The width of the trading band was again projected lower to locate the next support level near $0.79. This technical target was validated on a monthly chart. It acted as a strong resistance level in March and October 2004, from February to March 2005 and again from December 2006 to February 2007.

The long-term chart confirms that $0.79 is a reasonable historical support level. This is well above the level around $0.62 achieved in late 2008 and early 2009. The Reserve Bank of Australia has a target near $0.75, so there is a possibility of some consolidation below $0.79 and above $0.75

This Australian dollar's fall is traded as a long-term trend. Our preference is to trade this downward pressure on an intraday basis using the ANTSSYS approach to limit risk. The continued collapse of the Aussie confirms its re-transition from a profitable carry trade between 2011 and 2013 to a currency at the mercy of commodity prices. The fall to the technical target of $0.79 confirms a significant structural change in the Australian economy as the commodity engine stalls.

Daryl Guppy is a trader and author of Trend Trading, The 36 Strategies of the Chinese for Financial Traders – www.guppytraders.com. He is a regular guest on CNBCAsia Squawk Box. He is a speaker at trading conferences in China, Asia, Australia and Europe.