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How Low Can AUD/USD Go?

A strongly bearish bias for AUD/USD appears to be setting in as the pair recently formed a double top pattern then broke below the neckline near 1.0300 a few days back. The selloff could continue all the way down to the next support level around 1.0150 as these fundamental factors keep weighing the pair down:

Earlier this week, Australia released its January employment change report which showed that net hiring was up by 10,400 jobs during the month and that the unemployment rate stayed at 5.4%. However, a closer look at the components of the jobs report would reveal that the positive figure was merely a result of an increase in part-time hiring. On top of that, one of the main reasons why the jobless rate held steady was that the participation rate dropped, revealing that some Australians left the labor force and gave up looking for work.

This downturn in hiring doesn't bode well for consumer spending, which already saw a 0.2% decline in December. Even worse, the previous month's figure was revised downwards to show a 0.2% dip in retail sales while the October report showed a flat reading.

Since consumer spending comprises a huge chunk of overall economic growth, it won't be surprising if Australia prints a bleak GDP report for the last three months of 2012. This might be a good enough reason for RBA policymakers to consider cutting rates in their next interest rate decision.

Another factor that could push the RBA over the edge is Australia's muted quarterly inflation for Q4 2012. Their quarterly CPI came in at 0.2% for the period, lower than the estimated 0.4% rise in price levels and miles below the previous quarter's 1.4% increase.

During this month's RBA rate statement, Governor Glenn Stevens did mention that the weak inflation outlook could warrant monetary stimulus from the central bank. He emphasized that, even though external risks to the economy have waned, the RBA wouldn't hesitate to cut rates if necessary.

The minutes of their latest monetary policy meeting revealed that the central bank even cut forecasts for growth and inflation. Their initial forecast of 2.75% growth for 2013 was revised down to just 2.5% while consumer prices are expected to rise by only 3% instead of 3.25%.

Aside from that, RBA policymakers also expressed concern regarding the Aussie's recent rallies, citing that this could drag down demand for Australia's exports. Australia is a commodity-dependent and export-driven economy, which means that a slowdown in exports could take up a huge chunk of overall economic growth.

The next RBA monetary policy statement is scheduled on the first week of March, which means that traders could price in their expectations for a 0.25% rate cut as the event draws near.

AUD/USD could continue to selloff in the coming weeks now that China, one of its major trade partners, released a weaker than expected CPI figure. If risk stays off during the weeks leading up to the RBA statement, AUD/USD could test 1.0150 support trade as low as parity if that level breaks down.