Australian Dollar Talking Points

AUD/USD trades near the yearly high (0.7276) ahead of the Federal Reserve Economic Symposium, and the Australian Dollar may continue to outperform its US counterpart if the event foreshadows more of the same for the next interest rate decision on September 16.

AUD/USD Unfazed by Asia/Pacific Data with Fed Symposium on Tap

AUD/USD appears to be unfazed by data prints coming out of the Asian/Pacific region as it shows a limited reaction to the 19.6% rise in China’s Industrial Profits, but the series of higher highs and lows from earlier this week brings the 2019 high (0.7295) back on the radar as the less-than-expected decline in Australia’s Private Capital Expenditure is likely to keep the Reserve Bank of Australia (RBA) on the sidelines.

The gauge for business investment fell 5.9% in the second quarter of 2020 versus forecasts for an 8.2% decline, and the development may encourage the RBA to endorse a wait-and-see approach at the next meeting on September 1 as “the downturn in the first half of the year had been smaller than predicted.

In turn, Governor Philp Lowe and Co. may stick to the yield-target program as the central bank continues to rule out a negative interest rate policy (NIRP) for Australia, and the different approach in managing monetary policy may keep AUD/USD afloat as the Federal Open Market Committee (FOMC) vows to “increase its holdings of Treasury securities and agency residential and commercial mortgage-backed securities at least at the current pace.”

It remains to be seen if the Fed Economic Symposium will bring an end to current market trends as the FOMC discusses an outcome-based approach versus a calendar-based forward guidance for monetary policy, and fresh remarks from Chairman Jerome Powell and Co. may spur a material shift in AUD/USD behavior if the central bank shows a greater willingness to scale back its emergency measures in 2021.

Nevertheless, the event may foreshadow more of the same for the September meeting as the FOMC votes unanimously to push back “the expiration of the temporary U.S. Dollar liquidity swap lines through March 31, 2021,” and the Australian Dollar may continue to appreciate against the Greenback as the crowding behavior in AUD/USD looks poised to persist over the coming days.

Image of IG Client Sentiment for AUD/USD rate

The IG Client Sentiment report shows retail traders have bee net-short AUD/USD since April, with the latest update showing only 35.56% of traders net-long the pair as the ratio of traders short to long stands at 1.81 to 1. The number of traders net-long is 15.46% lower than yesterday and 8.51% higher from last week, while the number of traders net-short is 12.21% higher than yesterday and 16.67% higher from last week.

The recent decline in net-long position could be indicative of profit-taking behavior as AUD/USD trades near the yearly high (0.7276) ahead of the Fed symposium, while the rise in net-short interest suggests the tilt in retail sentiment will carry into the month ahead even though the Fed’s balance sheet climbs back above $7 trillion in August.

With that said, the 2019 high (0.7295) is back on the radar for AUD/USD as the recent weakness in the exchange rate may turn out to be an exhaustion in the bullish price action rather than a change in trend, but technical outlook is clouded with mixed signals as the Relative Strength Index (RSI) continues to deviate with price, with the oscillator snapping the upward trend established in July after failing to push into overbought territory.

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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 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) during the previous month even though the RSI failed to retain the upward trend from earlier this year, with the oscillator pushing into overbought territory for the fourth time in late-July.
  • The RSI established a bullish trend in July as AUD/USD traded to fresh yearly highs, but the indicator continues to deviate with price as it snaps trendline support after failing to push into overbought territory.
  • Nevertheless, the 2019 high (0.7295) is back on the radar for AUD/USD as it bounces back from the Fibonacci overlap around 0.7090 (78.6% retracement) to 0.7140 (23.6% retracement), with the next area of interest coming in around 0.7370 (38.2% expansion).
  • Will keep a close eye on the RSI as it holds below 70 even though AUD/USD trades to a fresh 2020 high (0.7276) in August, but lack of momentum to hold above the 0.7090 (78.6% retracement) to 0.7140 (23.6% retracement) region may bring the 0.6970 (23.6% expansion) to 0.6980 (23.6% expansion) area back on the radar as the bullish momentum appears to be abating.

— Written by David Song, Currency Strategist

Follow me on Twitter at @DavidJSong





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