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Why the Australian dollar trade is a 'simple short'

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The Governor of the Reserve Bank of Australia has done a hatchet job on talking down the Australian dollar towards a preferred target of $0.87.

Glenn Stevens signaled last week that the currency had more room to fall by flagging dovish view of RBA's monetary policy, citing Australia's weak economic growth and subdued inflation.

The comments exaggerated a sell-off in the currency which has fallen around 14 percent against the dollar this year, alongside a broad sell-off in commodities and on fears of a slowdown in China, Australia's biggest trading partner.

(Read more: Australia cuts rates to record low of 2.5%)

The Australian dollar may have rebounded slightly on Tuesday to trade near a 3-year low of $0.89, after the RBA offered no clear hints on further easing after a quarter point rate cut, but according to technical analysis, there is simply no reason to hold the currency.

The Aussie-U.S. dollar pair is simply, a carry trade that has collapsed.

Aussie at $0.94 was a strong support level since the beginning of 2011. It was the lower edge of a wide trading band where $1.02 was the mid-point of the band.

(Watch now: How much pain is in store for the Aussie?)

The currency spent more than two years essentially trading sideways between $0.94 and $1.08. The fall below $0.94 was a significant change in the behavior of the currency. It set a new and strong downtrend.

The monthly chart shows no indication of support near the widely touted $0.87 level. Once the Aussie falls below $0.94, the next support level is near $0.84. This is a weak support level.

(Read more: Here are other ways to play the weak Aussie trade)

The next strong support level is near $0.80. Hence, the Australia-dollar trade is a simple short.

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  • Daryl Guppy is an independent technical analyst who appears frequently on CNBC Asia.

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