Australian Dollar Talking Points
AUD/USD carves a series of higher highs and lows after defending the 2021 low (0.7564), and decline from the February high (0.8007) may turn out to be an exhaustion in the broader trend rather than a shift in behavior as key market themes remain in place.
AUD/USD Bullish Price Series Emerges After Defending 2021 Low
AUD/USD trades back above the 50-Day SMA (0.7737) as it extends the rebound from earlier this week, and the exchange rate may stay afloat ahead of the Federal Reserve interest rate decision on March 17 as the rebound coincides with the recent pullback in longer-dated US Treasury yields.
It remains to be seen if the Federal Open Market Committee (FOMC) will act at the quarterly meeting as Fed officials are slated to update the Summary of Economic Projections (SEP), but it seems as though the central bank is in no rush to alter the course for monetary policy even as the Reserve Bank of Australia (RBA) acknowledges that “changes in bond yields globally have been associated with volatility in some other asset prices, including foreign exchange rates.”
In turn, the FOMC may continue to utilize its non-standard tools in 2021 as the central bank extends the Paycheck Protection Program Liquidity Facilityby three months to June 30, and the committee may keep the door open to further support the US economy as Chairman Jerome Powell warns that “it’s not at all likely that we’d reach maximum employment this year.”
In turn, the US Dollar may continue to reflect an inverse relationship with investor confidence as long as the FOMC stays on track to “increase our holdings of Treasury securities by at least $80 billion per month and of agency mortgage-backed securities by at least $40 billion per month,” and it looks as though the crowding behavior from 2020 has resurfaced as traders flip net-short AUD/USD.
The IG Client Sentiment report shows 48.90% of traders are currently net-long AUD/USD, with the ratio of traders short to long standing at 1.04 to 1.
The number of traders net-long is 9.31% lower than yesterday and 17.22% lower from last week, while the number of traders net-short is 8.78% higher than yesterday and 2.73% lower from last week. As a result, open interest is 10.40% lower from the previous week, but the crowding behavior from 2020 appears to have resurfaced as 52.50% of traders were net-long AUD/USD earlier this week.
With that said, the decline from the February high (0.8007) may turn out to be an exhaustion in the broader trend rather than a shift in AID/USD behavior as the tilt in retail sentiment returns, and the exchange rate may stay afloat ahead of the FOMC rate decision as it carves a series of higher highs and lows after defending the 2021 low (0.7564).
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AUD/USD Rate Daily Chart
Source: Trading View
- Keep in mind, the AUD/USD correction from the September high (0.7414) proved to be an exhaustion in the bullish trend rather than a change in behavior as the exchange rate traded to fresh yearly highs throughout December.
- At the same time, developments in the Relative Strength Index (RSI)showed the bullish momentum gathering pace as the indicator pushed into overbought territory for the first time since September, with the break above 70 accompanied by a further appreciation in AUD/USD like the behavior seen in the first half of 2020.
- However, a textbook RSI sell signal emerged following the failed attempt to test the March 2018 high (0.7916), with AUD/USD trading to fresh 2021 lows in February as it failed to preserve the January range.
- Nevertheless, the pullback from the January high (0.7820) turned out to be a short lived, with AUD/USD trading to fresh yearly highs to negate the scope for a double-top formation.
- As a result, the decline from the February high (0.8007) may also be another exhaustion in the broader trend as AUD/USD trades back above the 50-Day SMA (0.7737) after defending the 2021 low (0.7564), but need a close above the towards the Fibonacci overlap around 0.7720 (38.2% expansion) to 0.7760 (23.6% expansion) to bring the 0.7880 (38.2% expansion) region back on the radar.
- Next area of interest comes in around 0.7930 (50% retracement) to 0.7950 (50% expansion) followed by the overlap around 0.7980 (50% expansion) to 0.8000 (78.6% expansion).
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— Written by David Song, Currency Strategist
Follow me on Twitter at @DavidJSong