AUD/USD Eyes Monthly High as RSI Approaches Trendline Resistance

Australian Dollar Talking Points

AUD/USD pares the decline from earlier this week despite the kneejerk reaction to Australia’s Employment report, and looming developments in the Relative Strength Index (RSI) may indicate a further appreciation in the exchange rate as the oscillator appears to be on track to take out the bearish trends from earlier this year.

AUD/USD Eyes Monthly High as RSI Approaches Trendline Resistance

AUD/USD approaches the monthly high (0.7805) as the US Dollar depreciates against all of its major counterparts, and the key market themes may keep the exchange rate afloat as the Greenback continues to reflect an inverse relationship with investor confidence.

In turn, the pullback from the January high (0.7820) may turn out to be an exhaustion in the broader trend rather than a change in market behavior as the Federal Reserve’s balance sheet climbs to a fresh record high of $7.442 trillion in the week of February 10, and fresh 2021 highs in AUD/USD may undermine the scope for a double-top formation as the Federal Open Market Committee (FOMC) stays on track to “increase our holdings of Treasury securities by at least $80 billion per month and of agency mortgage-backed securities by at least $40 billion per month.”

At the same time, the Reserve Bank of Australia (RBA) also appears to be on a preset course as the central bank pledges to “purchase an additional $100 billion of bonds issued by the Australian Government and states and territories when the current bond purchase program is completed in mid April,” and key market themes may continue to influence AUD/USD ahead of the next meeting on March 2 as the crowding behavior from 2020 resurfaces.

The IG Client Sentiment report shows 39.44% of traders are currently net-long AUD/USD, with the ratio of traders short to long standing at 1.54 to 1.

The number of traders net-long is 1.77% lower than yesterday and 2.25% lower from last week, while the number of traders net-short is 3.58% higher than yesterday and 8.69% lower from last week. The fall in net-short position comes as AUD/USD pares the decline from earlier this week, while the decline in net-long position has led to a further tilt in retail sentiment as 40.09% of traders were net-long the pair during the previous week.

With that said, the pullback from the January high (0.7820) may turn out to be an exhaustion in the bullish price action rather than a change in trend as key market themes remain in place, and looming developments in the Relative Strength Index (RSI) may indicate a further appreciation in the exchange rate as the oscillator appears to be on track to take out the bearish formations from earlier this year.

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AUD/USD Rate Daily Chart

Source: Trading View

• Keep in mind, the AUD/USD correction from the September high (0.7414) proved to be an exhaustion in the bullish trend rather than a change in behavior as the exchange rate traded to fresh yearly highs throughout December.
• At the same time, developments in the Relative Strength Index (RSI)showed the bullish momentum gathering pace as the indicator pushed into overbought territory for the first time since September, with the break above 70 accompanied by a further appreciation in AUD/USD like the behavior seen in the first half of 2020.
• However, a textbook RSI sell signal emerged following the failed attempt to test the March 2018 high (0.7916), with AUD/USD trading to fresh 2021 lows in February as it failed to preserve the January range.
• Nevertheless, the pullback from the January high (0.7820) may turn out to be an exhaustion in the broader trend rather than a shift in market behavior amid the string of failed attempts to break/close below the 0.7560 (50% expansion) to 0.7580 (61.8% expansion) region, with the RSI highlighting a similar dynamic as the indicator starts to clear the bearish formations from earlier this year.
• Looming developments in the RSI may indicate a further appreciation in AUD/USD if the oscillator continues to clear trendline resistance, with a move above the January high (0.7820) bringing the 0.7890 (100% expansion) region on the radar.
• The March 2018 high (0.7916) comes up next, which largely coincides with the Fibonacci overlap around 0.7930 (50% retracement) to 0.7950 (50% expansion).

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— Written by David Song, Currency Strategist

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