Australian Dollar Talking Points
AUD/USD tagged a fresh weekly high (0.7343) as the Reserve Bank of Australia (RBA) Minutes offered little hints for additional monetary support, and the Federal Reserve interest rate decision may keep current market trends in place as the central bank plans to “achieve inflation that averages 2 percent over time.”
AUD/USD Rate Forecast: 2020 High on Radar Following RBA Minutes
AUD/USD may continue to retrace the decline from the 2020 high (0.7414) as the RBA Minutes suggest the central bank will rely on its current tools to support the economic recovery, and Governor Philip Lowe and Co. may stick to the sidelines after tweaking the Term Funding Facility in September as “members agreed that the Board’s policy package implemented in mid March was continuing to support the Australian economy.”
It seems as though the RBA is in no rush to deploy additional monetary measures even though the Governor Lowe and Co. “consider how further monetary measures could support the recovery” as the central bank relies on its yield-target program, with the board insisting that “further purchases should be undertaken as necessary to maintain the target.”
In turn, it remains to be seen if the update the Australia’s Employment report will influence the monetary policy outlook as the economy is expected to shed 50K jobs in August, but the macroeconomic environment may keep AUD/USD afloat ahead of the next RBA rate decision on October 6 as the Federal Reserve plans to “achieve inflation that averages 2 percent over time.”
As a result, the update to the Summary of Economic Projections (SEP) may sway the near-term outlook for AUD/USD if the interest rate dot-plot may shows a downward revision in the longer-run forecast, but more of the same from the June meeting may spark a limited reaction as Chairman Jerome Powell and Co. vow to “increase its holdings of Treasury securities and agency residential and commercial mortgage-backed securities at least at the current pace.”
Looking ahead, current market trends may remain in place as the RBA rules out a negative interest rate policy (NIRP) for Australia, and the crowding behavior in AUD/USD may carry into the end of the month as retail traders have been net-short the pair since April.
The IG Client Sentiment report shows 44.86% of traders are net-long with the ratio of traders short to long at 1.23 to 1. The number of traders net-long is 1.56% higher than yesterday and 3.17% lower from last week, while the number of traders net-short is 4.07% lower than yesterday and 4.43% higher from last week.
The recent rise in net-long position has helped to alleviate the tilt in retail sentiment as only 41.74% of traders were net-long AUD/USD earlier this week, but the crowding behavior looks poised to persist even though the exchange rate trades to a fresh yearly (0.7414) high in September.
With that said, AUD/USD may continue to exhibit a bullish trend as it reverses course ahead of the 50-Day SMA (0.7176), and the Relative Strength Index (RSI) may show the bullish momentum gathering pace as it climbs towards overbought territory.
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AUD/USD Rate Daily Chart
Source: Trading View
- Keep in mind, the advance from the 2020 low (0.5506) gathered pace as AUD/USD broke out of the April range, with the exchange rate clearing the January high (0.7016) in June as the Relative Strength Index (RSI) pushed into overbought territory.
- AUD/USD managed to clear the June high (0.7064) in July even though the RSI failed to retain the upward trend from earlier this year, with the exchange rate pushing to fresh yearly highs in August and September to trade at its highest level since 2018.
- Recent developments in the RSI instilled a bullish outlook for AUD/USD as it threatened the downward trend from earlier this year to push into overbought territory for the fourth time in 2020, but a textbook sell-signal has emerged as the indicator quickly slipped back below 70.
- In turn, AUD/USD may continue to track the monthly range following the failed attempt to test the July 2018 high (0.7484), but the exchange rate appears to have reversed course ahead of the 50-Day SMA (0.7176) as it largely preserves the upward trend established in June.
- Will keep a close eye on the RSI as it climbs towards overbought territory, with a move above 70 likely to be accompanied by a further appreciation in AUD/USD like the behavior seen in June.
- Until then, the rebound from the monthly low (0.7192) may gather pace as AUD/USD holds above the 0.7270 (23.6% expansion) region, with the Fibonacci overlap around 0.7370 (38.2% expansion) to 0.7390 (38.2% expansion) back on the radar as the exchange rate clings to trendline support.
- Need a break of the 2020 high (0.7414) to open up the 0.7480 (50% expansion) region, with the next area of interest coming in around 0.7560 (50% expansion) to 0.7590 (61.8% expansion).
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— Written by David Song, Currency Strategist
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