AUD/USD Preserves Ascending Channel Formation Even as RSI Deviates


Australian Dollar Talking Points

AUD/USD trades to a fresh monthly high (0.6472) after threatening the upward trending channel from March, but the Relative Strength Index (RSI) undermines the recent strength in the Australian Dollar as the indicator deviates with price.

AUD/USD Preserves Ascending Channel Formation Even as RSI Deviates

AUD/USD extends the advance from earlier this month as governments across Australia (Queensland, Western Australia and the Northern Territory) unveil plans to gradually roll back the lockdown laws, and the unprecedented efforts take by fiscal as well as monetary authorities may help to jumpstart the economy as Treasurer Josh Frydenberg insists that response to COVID-19 “will ensure Australia bounces back stronger on the other side.”

The government sponsored programs like the JobKeeper payment may encourage the Reserve Bank of Australia (RBA) to establish a wait-and-see approach for monetary policy, and the central bank may strike a more balanced tone over the coming months as the “various responses were providing considerable support to Australian households and businesses.”

In turn, the RBA may offer little guidance at the next meeting on May 5, but the slowdown in China, Australia’s largest trading partner, may put pressure on Governor Philip Lowe and Co. to further support the economy as the update to the 1Q Gross Domestic Product (GDP) report undermines speculation for a V-shaped recovery.

The larger-than-expected decline in China’s growth rate may force the RBA to adjust the forward guidance, and the central bank may adopt a more dovish tone over the coming months as the International Monetary Fund (IMF) forecasts Australia to contract 6.7% this year.

As a result, the weakening outlook for growth may produce headwinds for the Australian Dollar, but the near-term recovery in AUD/USD may continue to evolve over the coming days as the exchange rate continues to track the upward trending channel from March.

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AUD/USD Rate Daily Chart

Image of AUD/USD rate daily chart

Source: Trading View

  • Keep in mind, the monthly opening range has been a key dynamic for AUD/USD in the fourth quarter of 2019 as the exchange rate carved a major low on October 2, with the high for November occurring during the first full week of the month, while the low for December materialized on the first day of the month.
  • The opening range for 2020 showed a similar scenario as AUD/USD marked the high of the month on January 2, with the exchange rate carving the February high during the first week of the month.
  • However, the opening range for March was less relevant, with the high of the month occurring on the 9th, the same day as the flash crash.
  • Nevertheless, the advance from the yearly low (0.5506) may continue to evolve as the rebound from channel support pushes AUD/USD to a fresh monthly high (0.6472), with the break/close above the Fibonacci overlap around 0.6380 (50% expansion) to 0.6450 (38.2% expansion) bringing the 0.6520 (38.2% expansion) to 0.6540 (78.6% expansion) region on the radar.
  • However, the Relative Strength Index (RSI) has deviated with price as the oscillator snaps the bullish formation from March and fails to push to fresh monthly highs during the final week of April.

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— Written by David Song, Currency Strategist

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