Australian Dollar Talking Points

AUD/USD trades to a fresh yearly high (0.7197) as the Federal Reserve retains a dovish forward guidance for monetary policy, and current market conditions may keep the exchange rate afloat as the crowding behavior in the US Dollar persists, while the Relative Strength Index (RSI) pushes into overbought territory.

AUD/USD Outlook: 2019 High on Radar as RSI Pushes Into Overbought Zone

The reaction to the Federal Open Market Committee (FOMC) interest rate decision warns of a further appreciation in AUD/USD as it extends the advance from the start of July, and the exchange rate appears to be on track to test the 2019 high (0.7295) as the RSI climbs into overbought territory for the fourth time this year.

Looking ahead, the RSI may mimic the behavior seen in June as the Reserve Bank of Australia (RBA) is expected to retain the current policy at its next meeting on August 4, and the Australian Dollar may continue to outperform its US counterpart as long as the oscillator holds above 70.

Image of IG Client Sentiment

At the same time, it looks as though the crowding behavior in the US Dollar will carry into the month ahead as the IG Client Sentiment report continues to show retail traders net-long USD/CHF, USD/CAD and USD/JPY, while the crowd remains net-short NZD/USD, AUD/USD, GBP/USD and EUR/USD.

Image of IG Client Sentiment for AUD/USD

Retail traders have been net-short AUD/USD since April, with the latest update showing 38.45% of traders net-long the pair as the ratio of traders short to long stands at 1.60 to 1. The number of traders net-long is 9.84% higher than yesterday and 25.14% higher from last week, while the number of traders net-short is 5.87% lower than yesterday and 11.21% lower from last week.

It seems as though the AUD/USD rally is fueling net-long interest as it extends the advance from the start of July, while the decline in net-short positions suggests stop-loss orders are being triggered as the exchange rate trades to a fresh 2020 high (0.7197).

With that said, current market conditions may keep AUD/USD afloat as the crowding behavior in the US Dollar persists, and the extreme RSI reading is likely to be accompanied by a further appreciation in the exchange rate like the behavior seen in June.

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AUD/USD Rate Daily Chart

Image of AUD/USD rate daily chart

Source: Trading View

  • Keep in mind, the advance from the yearly 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) even though the RSI failed to retain the upward trend from earlier this year, but the oscillator may mimic the behavior seen in June as the indicator pushes into overbought territory for the fourth time this year.
  • The break/close above the 0.7180 (61.8% retracement) region brings the 2019 high (0.7295) on the radar, with the next area of interest coming in around 0.7370 (38.2% expansion).

— Written by David Song, Currency Strategist

Follow me on Twitter at @DavidJSong





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