Australian Dollar Talking Points
AUD/USD extends the decline from the monthly high (0.743) as the Reserve Bank of Australia (RBA) offers more details regarding its forward guidance for monetary policy, and the Australian Dollar may continue to underperform against its major counterparts as it fails to retain the opening range for October.
AUD/USD Eyes September Low on More Detailed RBA Forward Guidance
AUD/USD appears to be on track to test the September low (0.7006) as RBA Governor Philip Lowe pledges to not increase the official cash rate (OCR) “for at least three years,” and it seems as though the central bank will offer a more details over the coming months as officials plan to update the economic in “early November.”
In a recent speech, Governor Lowe emphasized that the RBA is “considering what more we can do to support jobs, incomes and businesses in Australia to help build that important road to the recovery,” with the central bank going onto say that the board is “committed to do what we reasonably can, with the tools we have, to support the recovery of the Australian economy.”
The comments suggests the RBA is in no rush to implement more non-standard measures after tweaking the Term Funding Facility (TFF) in September, and the central bank may stick to the sidelines at the next interest rate decision on November 3 as “the recent Budget provided welcome further support to the economy.”
However, the ASX 30 Day Interbank Cash Rate Futures continues to reflect a greater than 70% probability for a rate cut in November, and speculation for an RBA rate cut may produce headwinds for the Australian Dollar as the “Board continues to consider how additional monetary easing could support jobs as the economy opens up further.”
In turn, it remains to be seen if the decline from the yearly high (0.7414) will turn out to be an exhaustion in the bullish trend or a change in AUD/USD behavior as the RBA relies on its current tools to support the economic recovery, and key market themes resulting from the COVID-19 pandemic may continue to sway exchange rate as the US Dollar shows an inverse relationship with investor confidence.
Nevertheless, the tilt in retail sentiment has dissipated following the speech by Governor Lowe as the IG Client Sentiment shows 50.40% of traders net-long AUD/USD, with the ratio of traders long to short standing at 1.02 to 1. The number of traders net-long is 3.48% lower than yesterday and 34.96% higher from last week, while the number of traders net-short is 0.56% lower than yesterday and 23.40% lower from last week.
The decline in net-short position could be indicative of profit-taking behavior as AUD/USD fails to retain the monthly opening range, while the jump in net-long interest has helped to alleviate the tilt in retail sentiment as only 39.87% of traders were net-long AUD/USD last week.
With that said, AUD/USD may attempt to test the September low (0.7006) as it fails to retain the opening range for October, but the Relative Strength Index (RSI) instills a more constructive outlook as the indicator reverses from oversold territory and breaks out a downward trend carried over from the previous month.
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AUD/USD Rate Daily Chart
Source: Trading View
- Keep in mind, the advance from the 2020 low (0.5506) gathered pace as AUD/USD broke out of the April range, with the exchange rate clearing the January high (0.7016) in June as the Relative Strength Index (RSI) pushed into overbought territory.
- AUD/USD managed to clear the June high (0.7064) in July even though the RSI failed to retain the upward trend from earlier this year, with the exchange rate pushing to fresh yearly highs in August and September to trade at its highest level since 2018.
- The RSI instilled a bullish outlook for AUD/USD during the same period as it threatened the downward trend from earlier this year to push into overbought territory for the fourth time in 2020, but a textbook sell-signal emerged as the indicator quickly slipped back below 70.
- The RSI established a downward trend in September as the indicator fell to its lowest level since April, but the bearish momentum has abated as the RSI fails to push into oversold territory to reflect the extreme readings seen in March.
- It remains to be seen if the correction from the yearly high (0.7414) will turn out to be a change in AUD/USD behavior or an exhaustion in the bullish trend as the RSI breaks out of the downward trend carried over from the previous month, but back of momentum to hold above the Fibonacci overlap around 0.7090 (78.6% retracement) to 0.7140 (23.6% retracement) brings the September low (0.7006) on the radar as the exchange rate fails to retain the opening range for October.
- Next area of interest comes in around 0.6970 (23.6% expansion) followed by the overlap around 0.6760 (38.2% expansion) to 0.6820 (50% retracement).
- Need a closing price back above the Fibonacci overlap around 0.7090 (78.6% retracement) to 0.7140 (23.6% retracement) to bring the 0.7180 (61.8% retracement) region back on the radar, with the next area of interest coming in around 0.7270 (23.6% expansion).
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— Written by David Song, Currency Strategist
Follow me on Twitter at @DavidJSong