Australian Dollar Talking Points
AUD/USD fails to extend the series of lower highs and lows from the previous week as it attempts to retrace the decline following the US Non-Farm Payrolls (NFP) report, and the exchange rate may continue to defend the 2021 low (0.7564) as the US Dollar still reflects an inverse relationship with investor confidence.
AUD/USD Rate Retraces Post-NFP Decline to Defend 2021 Low
AUD/USD holds above last week’s low (0.7621) to trade in a narrow range, and the broader rise in US Treasury yields appears to be influencing the exchange rate 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.”
Nevertheless, it seems as though the RBA is on a preset course as Governor Philip Lowe and Co. reiterate that “a further $100 billion will be purchased” once the initial government bond purchase program is completed in April, and the wait-and-see approach for monetary policy may keep the Australian Dollar around “the upper end of the range of recent years” as the central bank relies on its balance sheet to achieve its policy targets.
In turn, it remains to be seen if the decline from the February high (0.8007) will turn out to be an exhaustion in the broader trend or a potential shift in AUD/USD behavior as the exchange rate struggles to hold above the 50-Day SMA (0.7730), but the recent weakness in the Australian Dollar has triggered a shift in retail sentiment as traders turned net-long the pair just ahead of March.
The IG Client Sentiment report shows 52.50% of traders are currently net-long AUD/USD as the ratio of traders long to short stands at 1.11 to 1.
The number of traders net-long is 15.12% higher than yesterday and 9.52% lower from last week, while the number of traders net-short is 20.38% higher than yesterday and 10.82% higher from last week. The decline in net-long interest suggests the flip in retail sentiment could be temporary as 56.92% of traders were net-long AUD/USD last week, while the rise in net-short interest comes as the exchange rate struggles to hold above the 50-Day SMA (0.7730).
With that said, AUD/USD may continue to reflect the bullish price action seen in 2020 as the Federal Reserve 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 the exchange rate may continue to defend the 2021 low (0.7564) as key market themes remain in place.
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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 appears to be defending the 2021 low (0.7564) even as it struggles to hold above the 50-Day SMA (0.7730).
- Lack of momentum to close below the 0.7630 (38.2% retracement) region may push AUD/USD back towards the Fibonacci overlap around 0.7720 (38.2% expansion) to 0.7760 (23.6% expansion), with the next area of interest coming in around 0.7880 (38.2% expansion) followed by the 0.7930 (50% retracement) to 0.7950 (50% expansion) zone.
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— Written by David Song, Currency Strategist
Follow me on Twitter at @DavidJSong