AUD/USD Rate Rebound Takes Shape Within Descending Channel Formation

Australian Dollar Talking Points

AUD/USD appears to have reversed course ahead of the November 2020 low (0.6991) after marking the first five-day decline in nearly a year, but the recent rebound in the exchange rate may end up being short lived as it trades within the confines of a descending channel.

AUD/USD Rate Rebound Takes Shape Within Descending Channel Formation

AUD/USD extends the rebound from the start of the week as it bounces back from channel support, but the Kansas City Fed Economic Symposium scheduled for August 26 – 28 may undermine the recent recovery in the exchange rate as a growing number of Federal Reserve officials show a greater willingness to scale back monetary support.

In contrast, the renewed lockdowns across Asia/Pacific may keep the Reserve Bank of Australia (RBA) on the sidelines as the central bank insists that the “Board would be prepared to act in response to further bad news on the health front should that lead to a more significant setback for the economic recovery.”

It remains to be seen if the unexpected rise in Australia Employment will sway Governor Philip Lowe and Co. as the central bank acknowledges that “fiscal policy is a more appropriate instrument than monetary policy for providing support,” and the diverging paths for monetary policy may drag on AUD/USD ahead of the next RBA interest rate decision on September 7 if the Fed symposium fuels speculation for a looming shift in US monetary policy.

In turn, the recent rebound in AUD/USD may end up being short lived as it continue to track the downward trend from earlier this year, but a further decline in the exchange rate may fuel the tilt in retail sentiment like the behavior seen earlier this year.

The IG Client Sentiment report shows 64.98% of traders are currently net-long AUD/USD, with the ratio of traders long to short standing at 1.86 to 1.

The number of traders net-long is 10.77% lower than yesterday and 2.96% lower from last week, while the number of traders net-short is 14.55% higher than yesterday and 2.70% lower from last week. The decline in net-long position has helped to alleviate the crowding behavior as 66.96% of traders were net-long AUD/USD last week, while the decline in net-short position comes as the exchange rate extends the advance from the start of the week.

With that said, AUD/USD may work its way towards the top of the descending channel ahead of the Fed symposium as it bounces back from trendline support, but Aussie Dollar may continue to give back the advance from the November 2020 low (0.6991) as the 50-Day SMA (0.7409) reflects a negative slope, with the trajectory of the moving average largely aligning with the downward trend in exchange rate.

AUD/USD Rate Daily Chart

Source: Trading View

• There appears to be a shift in the broader trend as AUD/USD sits below the 200-Day SMA (0.7604) for the first time in over a year, with the decline in the exchange rate pushing the Relative Strength Index (RSI) into oversold territory for the first time since March 2020.
• At the same time, the 50-Day SMA (0.7409) has developed a negative slope as AUD/USD trades within a descending channel, with the trajectory of the moving average largely aligning with the downward trend in exchange rate.
• However, AUD/USD has bounced back from channel support followed the failed attempt to close below the 0.7130 (61.8% retracement) to 0.7140 (23.6% expansion) region, with the move above the Fibonacci overlap around 0.7180 (61.8% retracement) to 0.7210 (78.6% retracement) bringing the 0.7290 (23.6% expansion) region back on the radar, which largely lines up with trendline resistance.
• Need a close below the 0.7130 (61.8% retracement) to 0.7140 (23.6% expansion) region to bring the 0.7060 (61.8% expansion) to 0.7090 (78.6% retracement) area on the radar, with the break of the November 2020 low (0.6991) opening up the 0.6950 (78.6% expansion) zone.

— Written by David Song, Currency Strategist

Follow me on Twitter at @DavidJSong