Australian Dollar Talking Points
AUD/USD preserve the opening range for January as it breaks out of the series of lower highs and lows from the previous week, and key market trends may keep the exchange rate afloat as the Reserve Bank of Australia (RBA) acknowledges that “the improvement in risk sentiment has also been associated with a depreciation of the US dollar and an appreciation of the Australian dollar.”
AUD/USD Rate Outlook Hinges on Break of January Opening Range
AUD/USD consolidates after taking out the April 2018 high (0.7813), but the pullback from the monthly high (0.7820) triggered a textbook sell signal in the Relative Strength Index (RSI), with the oscillator starting to deviate with price as the indicator no longer tracks the upward trend established in November.
The divergence in the RSI may become increasingly transparent as a bearish formation takes shape, but AUD/USD appears to have reversed course ahead of the monthly low (0.7642) amid the recent recovery in global equity prices. In turn, swings in risk appetite may continue sway AUD/USD ahead of the next Federal Reserve interest rate decision on January 27 as the US Dollar still reflects an inverse relationship with investor confidence, and the tilt in retail sentiment also looks poised to persist as traders have been net-short the pair since November.
The IG Client Sentiment report shows 45.23% of traders are currently net-long AUD/USD, with the ratio of traders short to long standing at 1.21 to 1. The number of traders net-long is 1.54% higher than yesterday and 29.48% higher from last week, while the number of traders net-short is 1.74% lower than yesterday and 5.04% lower from last week.
The jump in net-long interest along with the decline in net-short position has helped to alleviate the crowding behavior in AUD/USD as 43.39% of traders were net-long the pair earlier this week, but the ongoing tilt in retail sentiment may continue coincide with the key market trends seen in 2020 as major central banks rely on their non-standard tools to achieve their policy targets.
With that said, the US Dollar may continue to reflect an inverse relationship with investor confidence as the Federal Open Market Committee (FOMC) remains on track to increase its “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 stage another attempt to test the March 2018 high (0.7916) as long as it preserves the opening range for January.
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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 cleared the October high (0.7243) in November, with the pair trading 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 the oscillator starting to diverge with price as the indicator establishes a downward trend in January.
- Nevertheless, AUD/USD appears to have reversed course ahead of the monthly low (0.7642) as it climbs back above the Fibonacci overlap around 0.7720 (78.6% expansion) to 0.7740 (61.8% expansion), with a move above last week’s high (0.7820) bringing the 0.7890 (100% expansion) region back on the radar.
- The March 2018 high (0.7916) comes up next, with the next area of interest coming in around 0.7930 (50% retracement) to 0.7950 (50% expansion).
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— Written by David Song, Currency Strategist
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