Australian Dollar Talking Points

AUD/USD attempts to retrace the decline from the previous week as it bounces back from a fresh yearly low (0.6993), but the Reserve Bank of Australia (RBA) interest rate decision may produce headwinds for the exchange rate as the central bank is widely expected to retain the current policy.

AUD/USD Forecast: Australian Dollar Susceptible to Wait-and-See RBA

AUD/USD appears to be defending the October 2020 low (0.6991) following the kneejerk reaction to the US Non-Farm Payrolls (NFP) report, and looming developments in the Relative Strength Index (RSI) may indicate a near-term rebound in the exchange rate as the oscillator is on the cusp of climbing above 30 to offer a textbook buy signal.

Image of DailyFX Economic Calendar for Australia

However, the RBA’s last rate decision for 2021 may do little to shore up AUD/USD as Governor Philip Lowe and Co. are widely expected to keep the official cash rate at the record low of 0.10%, and the central bank may merely attempt to buy time the after concluding its yield-curve control (YCC) program in November as “the Board is committed to maintaining highly supportive monetary conditions to achieve a return to full employment in Australia and inflation consistent with the target.”

As a result, the Australia Dollar may continue to underperform against its US counterpart as the RBA pledges to “not increase the cash rate until actual inflation is sustainably within the 2 to 3 per cent target range,” and it seems as though the central bank will carry out a wait-and-see approach over the coming months as the “Board is prepared to be patient.”

In turn, the diverging paths between the RBA and Federal Reserve may keep AUD/USD under pressure as Chairman Jerome Powell and Co. appear to be on track to implement higher interest rates in 2022, but a further depreciation in the exchange rate may fuel the tilt in retail sentiment like the behavior seen earlier this year.

Image of IG Client Sentiment for AUD/USD rate

The IG Client Sentiment report shows 76.95% of traders are currently net-long AUD/USD, with the ratio of traders long to short standing at 3.34 to 1.

The number of traders net-long is 6.77% higher than yesterday and 6.77% higher from last week, while the number of traders net-short is 27.74% higher than yesterday and 5.19% lower from last week. The rise in net-long interest has fueled the crowding behavior as 72.22% of traders were net-long AUD/USD last week, while the decline in net-short position comes as the exchange rate bounces back from a fresh yearly low (0.6993).

With that said, the RBA rate decision may curb the recent rebound in AUD/USD as the central bank remains in no rush to normalize monetary policy, and the exchange rate may face a further decline over the coming days if the Relative Strength Index (RSI) continues to below 30 to sit in oversold territory.

AUD/USD Rate Daily Chart

Image of AUD/USD rate daily chart

Source: Trading View

  • Keep in mind, AUD/USD trades to fresh yearly lows throughout the second-half of 2021 as the Relative Strength Index (RSI) slips below 30 for the first time since March 2020, with a similar development taking shape coming into December as the oscillator sits in oversold territory.
  • AUD/USD may continue to deprecate as long as the RSI holds below 30, but need a break of the October 2020 low (0.6991) to bring the 0.6940 (78.6% expansion) region on the radar, with the next area of interest coming in around 0.6770 (100% expansion) to 0.6820 (23.6% retracement).
  • However, the RSI may indicate a near-term rebound in AUD/USD as the oscillator is on the cusp of climbing above 30 to offer a textbook buy signal, and the exchange rate may work its way towards the Fibonacci overlap around 0.7070 (61.8% expansion) to 0.7090 (78.6% retracement) as long as it defends the October 2020 low (0.6991).
  • Next area of interest comes in around 0.7130 (61.8% retracement) to 0.7180 (61.8% retracement) followed by the 0.7260 (38.2% expansion) region.

— Written by David Song, Currency Strategist

Follow me on Twitter at @DavidJSong

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