AUD/USD Rate Recovery to Face Slowdown in Australia CPI

Australian Dollar Talking Points

AUD/USD appears to be outperforming its major counterparts going into the end of October as it attempts to retrace the pullback from the monthly high (0.7547), and the update to Australia’s Consumer Price Index (CPI) may do little to derail the rebound in the exchange rate as the report is anticipated to reinforce expectations for a transitory rise in inflation.

AUD/USD Rate Recovery to Face Slowdown in Australia CPI

AUD/USD cleared the September high (0.7478) as the Relative Strength Index (RSI) pushed into overbought territory for the first time since February, and the exchange rate may attempt to trade above the 200-Day SMA (0.7560) for the first time since July as the recent series of lower highs and lows unravel.

It remains to be seen if fresh data prints coming out of Australia will influence the near-term outlook for AUD/USD amid the limited reaction to the weaker-than-expected Australia Employment report, and the CPI figures may keep the Reserve Bank of Australia (RBA) on track to retain the current course for monetary policy as the headline reading is expected to narrow to 3.1% from 3.8% per annum in the second quarter of 2021.

Evidence of easing price growth may encourage Governor Philip Lowe and Co. to overlook the recent developments as “the Delta outbreak has interrupted the recovery of the Australian economy,” and current market conditions may keep AUD/USD afloat ahead of the next RBA meeting on November 2 as “setback to the economic expansion in Australia is expected to be only temporary.”

In turn, AUD/USD may attempt to trade above the 200-Day SMA (0.7560) for the first time since July as the minutes from the September meeting suggest the RBA is becoming concerned about level of monetary support, but a larger pullback in the exchange rate may continue to alleviate the tilt in retail sentiment like the behavior seen during the previous month.

The IG Client Sentiment report shows 42.81% of traders are currently net-long AUD/USD, with the ratio of traders short to long standing at 1.34 to 1.

The number of traders net-long is 6.75% higher than yesterday and 2.20% lower from last week, while the number of traders net-short is 5.91% higher than yesterday and 3.04% lower from last week. The decline in net-long position comes as AUD/USD pulls back from the a fresh monthly high (0.7547), while the decline in net-short interest has helped to alleviate the tilt in retail sentiment as 41.92% of traders were net-long the pair last week.

With that said, fresh data prints coming out of Australia may do little to derail the correction in AUD/USD as the Relative Strength Index (RSI) marks the first overbought reading since February, and another move above 70 in the oscillator may indicate a further advance in the exchange rate like the price action seen during the previous week.

AUD/USD Rate Daily Chart

Source: Trading View

• Keep in mind, AUD/USD traded to fresh yearly lows in the second-half of 2021 as theRelative Strength Index (RSI)slipped below 30 for the first time since March 2020, but lack of momentum to test the August low (0.7106) has led to a near-term correction in the exchange rate, with the pair approaching the 200-Day SMA (0.7560) as it cleared the September high (0.7478).
• It remains to be seen if AUD/USD will push above the 200-Day SMA (0.7560) for the first time since July as the advance from the monthly low (0.7192) appears to be stalling ahead of the 0.7550 (50% expansion) to 0.7570 (78.6% retracement) region, but another move above 70 in the RSI is likely to be accompanied by a further appreciation in the exchange rate like the behavior seen earlier this month.
• In turn, a break/close above the 0.7550 (50% expansion) to 0.7570 (78.6% retracement) region may push AUD/USD towards the July high (0.7599), with the next area of interest coming in around 0.7620 (38.2% retracement) to 0.7640 (38.2% retracement).
• However, failure to push above the 200-Day SMA (0.7560) may push AUD/USD back towards the 0.7440 (23.6% expansion) area, with the next region 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