Australian Dollar Talking Points
AUD/USD extends the series of lower highs and lows from earlier this week on the back of US Dollar strength, and the exchange rate appears to be on track to test the August low (0.7076)as the Reserve Bank of Australia (RBA) provides further details regarding the options for monetary policy.
AUD/USD Rate Eyes August Low as RBA Outlines Monetary Policy Options
AUD/USD trades to a fresh monthly low (0.7128) as the advance in the US Dollar coincides with the decline in global equity prices, and a further shift in risk sentiment may keep the exchange rate under pressure as the RBA warns that “under the central scenario, it would be more than three years before sufficient progress was being made towards full employment to be confident that inflation will be sustainably within the target band.”
Recent remarks from Deputy Governor Guy Debelle suggest the RBA will take additional steps to support the economy after tweaking the Term Funding Facility (TFF) in September as the board member outlines four options for monetary policy, which includes expanding the yield target program, intervention in foreign exchange markets, lowering the “current structure of rates in the economy a little more without going into negative territory,” as well as a negative interest rate policy (NIRP).
Debelle insists that “the Board will continue to assess the merits of the range of monetary options to best support the economic recovery” as the official cash rate (OCR) sits at the record low of 0.25%, and the central bank may continue to prepare Australian households and businesses for additional monetary support “given the protracted nature of the recovery.”
It remains to be seen if the RBA will deploy more non-standard measures at the next meeting on October 6 as Treasurer Josh Frydenberg is scheduled to deliver the federal budget update on the same day, but the crowding behavior in AUD/USD looks poised to persist over the coming days as retail traders have been net-short the pair since April.
The IG Client Sentiment report shows 49.26% of traders are net-long AUD/USD, with the ratio of traders short to long at 1.03 to 1. The number of traders net-long is 2.65% lower than yesterday and 2.93% lower from last week, while the number of traders net-short is 3.38% lower than yesterday and 12.48% lower from last week.
The decline in net-long position could be a function of stop-loss orders getting triggers as AUD/USD trades to a fresh monthly low (0.7128), while the decline in net-short interest has helped to alleviate the tilt in retail sentiment as only 44.86% of traders were net-long the pair last week.
With that said, a further decline in AUD/USD may spur a larger shift in retail positioning as the exchange rate trades below the 50-Day SMA (0.7201) for the first time since April, and the exchange rate appears to be on track to test the August low (0.7076) as it extends the series of lower highs and lows from earlier this week.
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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.
- Recent developments in the RSI instilled a bullish outlook for AUD/USD 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 has emerged as the indicator quickly slipped back below 70.
- Will keep a close eye on the RSI as it sits at its lowest level since April, and the indicator may show the bearish price action gathering pace as it approaches oversold territory.
- In turn, AUD/USD appears to be on track to test the August low (0.7076) as ittrades below the 50-Day SMA (0.7201) for the first time in April and it extends the series of lower highs and lows from earlier this week.
- Need a break/close below the Fibonacci overlap around 0.7090 (78.6% retracement) to 0.7140 (23.6% retracement) to bring the 0.6970 (23.6% expansion) region on the radar, with the next area of interest comes in around 0.6760 (38.2% expansion) to 0.6820 (50% retracement), which lines up with the 200-Day SMA (0.6771).
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— Written by David Song, Currency Strategist
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