- AUD/USD closes on pivotal area between 0.7620 and 0.7640.

- When the Australian Dollar moves, it moves big.

- Strategists eye potential for a big drop if support gives way.

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The Australian Dollar edged higher against its international rivals ahead of the weekend but remains close to a key support level against its US counterpart, and strategists are warning that if this gives way a fierce sell-off could ensue.

Australia's currency has endured a testing week that saw it repeatedly threaten a break below a two year trend line against the US Dollar. For now this crux of support, which rests between the 0.7620 and 0.7640 area, has held firm although strategists are increasingly contemplating what might happen if the level gives way.

"Over the past two-plus years the currency has been able to shrug off a sharp decline in yield support against the USD across much of the curve, thanks to improving sentiment surrounding Australia’s major trade partners. A deterioration in sentiment could therefore leave the AUD looking particularly exposed," says Simon Derrick, chief currency strategist at BNY Mellon.

Derrick touches on one of the greatest threat to the Australian Dollar in today's currency markets when referring to the tables having turned in bond markets and how yield dynamics now favour the US Dollar. This is the result of the Federal Reserve having raised interest rates times in the last two years while the Reserve Bank of Australia cut its cash rate and has held it at a record low of 1.5% ever since August 2016.

"It’s worth highlighting that the 2-year, 5-year and 10-year yield gaps are now at such extremes that US yields actually stand above their Australian equivalents, a situation not seen since 2000 when the AUD was trading closer to USD 0.5000," Derrick adds.

This matters for currency markets because yields are the primary measure of return for investors in money and bond markets. Even small differentials between returns offered in one country over another can have a powerful impact on international capital flows and speculators' views on a given currency.

"The AUD has shown a marked propensity over the past 18 years for rapid and sustained moves. Over 10 instances of 20% y/y moves have developed for the AUD against the USD since the start of the new century," Derrick warns. "For the moment the two year-plus uptrend remains intact. However, should it break then the risk is that a particularly sharp move develops."

Above: AUD/USD rate shown at weekly intervals.

For all of the changes in bond market and interest rate dynamics, the Australian Dollar has weathered these without serious event, along with the numerous other instigating challenges such as the commodity collapse, fears of a slowdown in China and now concerns over a possible trade war between the world's two largest economies. However, the Antipodean unit's margin of safety has been getting narrower in recent weeks and optimistic voices are in a distinct minority.

"Domestic data has come up on the positive side more recently but with no impact for rates. As we said before, ongoing strength in growth momentum is encouraging, but any hawkish shift at the RBA (and thus any re-pricing of the rate path) will hinge importantly on a sustained pickup in inflation – which is not on the radar yet," says Daniel Been, head of research at ANZ Research. "Global risk sentiment is likely to remain the main driver of the Aussie; and, given how vulnerable sentiment has proven to be more recently, we suggest using any strength in the NAB survey to reset shorts."

Australia's labour market has been a relative bright spot for the economy in the last year, with the unemployment falling and remaining near to a four and a half year low during recent months, although this has been overshadowed somewhat by continued low levels of wage growth. Retail sales also surprised on the upside for the most recent month, which may suggest that while the consumer is down it is not quite out yet, although this too pales into insignificance in light of persistent below-target inflation.

All of these factors are seen preventing the RBA from even considering raising interest rates, which means the Australian Dollar will remain at the whim of global factors such as the latest headlines around international trade relations and the most recent musings of Federal Reserve interest rate setters in the US.

"AUDUSD looking heavy once again into the lows, but the three prior attempt to post new lows for the cycle have led nowhere, even as the bounces have done likewise. We’re not hopeful for the Aussie – noting the lagging RBA expectations and commodity prices not cooperating, and concerns on the financial stability front popping up if we look at the big Australian bank stock prices," warns John Hardy, head of FX strategy at Saxo Bank.

Still, and although a strikingly small choir, not all voices in the analyst community are warning of pending doom for the Antipodes' larger Dollar.

“This pair has broken out of the first falling wedge, a bullish correction is in the works. The 50% retracement of the Jan-Mar fall could bring this pair towards 0.7890. Interim resistance is seen around 0.7760 (23.6%),” writes Saktiandi Supaat, an FX strategist at Maybank in Singapore, in a note this week. "We see a tactical opportunity to buy this pair [AUDUSD] at current spot at 0.7690. Target first level at 0.7760 before the next at 0.7830. Stop-loss at 0.7640.”

The AUD/USD rate was quoted 0.10% higher at 0.7675 during noon trading in London Friday while the Pound-to-Australian-Dollar rate was 0.09% lower at 1.8247.

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