Australian Dollar Outlook:
- AUD/JPY rates are edging towards bull flag resistance, which has been in place since the middle of June.
- AUD/USD rates established a morning star candlestick pattern in recent days, but there was no follow through today.
- According to theIG Client Sentiment Index, AUD/JPY rates have a bearish bias while AUD/USD rates have a mixed bias.
Still Telling Different Stories
In our prior update, it was noted that “AUD/USD rates’ downside – and the weakness seen by the Aussie elsewhere – suggests that AUD/JPY rates’ recent consolidation is likely to continue.” Not much has changed over the past week, but recent price action suggests that the landscape may be on the precipice of a meaningful shift.
AUD/USD rates are down slightly on the day, but only after establishing a morning star candlestick pattern over the prior three days – a bottom pattern. Meanwhile, AUD/JPY rates are slowly grinding higher towards multi-month bull flag resistance. In both cases, the potential exists for bullish opportunities in the two major AUD-crosses.
AUD/USD RATE TECHNICAL ANALYSIS: DAILY CHART (August 2021 to August 2022) (CHART 1)
Last week it was noted that “a move back to the August low at 0.6869 is in focus.” While that transpired in recent days, AUD/USD rates’ fortunes may be changing. There may not have been follow through to the upside today, but the morning star candlestick pattern carved out over the prior three days speaks to bottoming potential in AUD/USD rates. A move above the daily 5-, 8-, 13-, and 21-EMA envelope, which remains in bearish sequential order, would clear the first obstacle for more bullish opportunities ahead.
IG Client Sentiment Index: AUD/USD RATE Forecast (August 24, 2022) (Chart 2)
AUD/USD: Retail trader data shows 66.05% of traders are net-long with the ratio of traders long to short at 1.95 to 1. The number of traders net-long is 0.23% higher than yesterday and 5.31% higher from last week, while the number of traders net-short is 3.28% higher than yesterday and 0.91% higher from last week.
We typically take a contrarian view to crowd sentiment, and the fact traders are net-long suggests AUD/USD prices may continue to fall.
Positioning is less net-long than yesterday but more net-long from last week. The combination of current sentiment and recent changes gives us a further mixed AUD/USD trading bias.
AUD/JPY RATE TECHNICAL ANALYSIS: DAILY CHART (August 2021 to August 2022) (CHART 3)
Not much has changed over the past week. It remains the case that “AUD/JPY rates are in a familiar area, continuing to trade around the 61.8% Fibonacci extension of the March 2020 low/May 2021 high/August 2021 range at 92.92 and the 76.4% Fibonacci retracement of the 2013 high/2020 low range at 94.68. More broadly, the pair remains within the bull flag that’s been carved out since mid-June.”
What has changed, however, is that momentum is turning more bullish. AUD/JPY rates are trading above their daily 5-, 8-, 13-, and 21-EMA envelope, which is in bullish sequential order. Daily MACD is trending higher above its signal line, while daily Slow Stochastics have moved back into overbought territory. A breakout from the bull flag would suggest an initial move higher to the yearly highs at 96.88 in the near-term.
IG Client Sentiment Index: AUD/JPY Rate Forecast (August 24, 2022) (Chart 4)
AUD/JPY: Retail trader data shows 29.26% of traders are net-long with the ratio of traders short to long at 2.42 to 1. The number of traders net-long is 23.01% higher than yesterday and 24.11% higher from last week, while the number of traders net-short is 2.89% lower than yesterday and 3.45% lower from last week.
We typically take a contrarian view to crowd sentiment, and the fact traders are net-short suggests AUD/JPY prices may continue to rise.
Yet traders are less net-short than yesterday and compared with last week. Recent changes in sentiment warn that the current AUD/JPY price trend may soon reverse lower despite the fact traders remain net-short.
— Written by Christopher Vecchio, CFA, Senior Strategist