AUD/USD Attempts to Halt Four Day Decline Ahead of Fed Rate Decision

Australian Dollar Talking Points

AUD/USD is little changed from the start of the week following the limited reaction to the Reserve Bank of Australia (RBA) Minutes, but the Federal Reserve interest rate decision may drag on the exchange rate as the central bank appears to be on track to alter the path for monetary policy.

AUD/USD Attempts to Halt Four Day Decline Ahead of Fed Rate Decision

AUD/USD manages to hold above the weekly low (0.7220) in an attempt to halt a four day decline, but the diverging paths between the RBA and Fed may keep the exchange rate under pressure as Governor Philip Lowe and Co. reiterate that “the outbreak of the Delta variant had delayed, but not derailed, the recovery.”

The minutes from the September meeting suggest the RBA will stick to a wait-and-see approach for the foreseeable future as “progress towards the Bank’s goals was likely to take longer,” and it seems as though the board will continue to rely on its non-standard tools to support the economy as the central bank plans to “purchase government securities at the rate of $4 billion a week and to continue the purchases at this rate until at least mid February 2022.”

As a result, fresh developments coming out of the Federal Open Market Committee (FOMC) meeting are likely to sway AUD/USD as the RBA appears to be on a preset course, and the exchange rate may continue to trade to fresh yearly lows in the second half of 2021 if the central bank delivers an exit strategy.

At the same time, the Greenback may face a bearish reaction if the FOMC stays on track to “to increase its holdings of Treasury securities by at least $80 billion per month and of agency mortgage‑backed securities by at least $40 billion per month,” but the Summary of Economic Projections (SEP) may shore up the US Dollar as Fed officials forecast two rate hikes in 2023.

In turn, AUD/USD may continue to give back the rebound from the August low (0.7106) if Chairman Jerome Powell and Co. forecast as steeper path for the fed funds rate, but a further depreciation in the exchange rate may fuel the recent flip in retail sentiment like the behavior seen earlier this year.

The IG Client Sentiment report shows 60.41% of traders are currently net-long AUD/USD, with the ratio of traders long to short standing at 1.53 to 1.

The number of traders net-long is 3.08% higher than yesterday and 12.43% higher from last week, while the number of traders net-short is 4.73% lower than yesterday and 13.90% lower from last week. The rise in net-long interest had fueled the flip in retail sentiment as 54.01% of traders were net-long AUD/USD last week, while the decline in net-short position comes as the exchange rate attempts to halt a four day decline.

With that said, the rebound from the August low (0.7106) may turn out to be a correction in the broader trend as the RBA retains a dovish forward guidance, and the exchange rate may continue to trade to fresh yearly lows in the second half of 2021 if the FOMC delivers an exit strategy.

AUD/USD Rate Daily Chart

Source: Trading View

• Keep in mind, AUD/USD sits below the 200-Day SMA (07597) for the first time in over a year, with the decline from the May high (0.7891) pushing the Relative Strength Index (RSI) into oversold territory for the first time since March 2020.
• As a result, the 50-Day SMA (0.7329) established a negative slope as AUD/USD traded to fresh yearly lows in the second-half of 2021, and the rebound from the August low (0.7106) may turn out to be a correction in the broader trend it trades back below the moving average.
• Need a break/close below the Fibonacci overlap around 0.7180 (61.8% retracement) to 0.7210 (78.6% retracement) to bring the 0.7130 (61.8% retracement) to 0.7140 (23.6% expansion) region on the radar, with a move below the August low (0.7106) opening up the 0.7060 (61.8% expansion) to 0.7090 (7.8% expansion) region.
• However, lack of momentum to clear the Fibonacci overlap around 0.7180 (61.8% retracement) to 0.7210 (78.6% retracement) may push AUD/USD back towards the 0.7290 (23.6% expansion) region, with the next area of interest coming in around 0.7370 (38.2% expansion) to 0.7380 (61.8% retracement).

— Written by David Song, Currency Strategist

Follow me on Twitter at @DavidJSong