Australian Dollar Talking Points
AUD/USD consolidates ahead of Australia’s Gross Domestic Product (GDP) report as the data is expected to confirm the first recession in nearly 30 years, but key market trends may keep the exchange rate afloat throughout the remainder of the year as the Reserve Bank of Australia (RBA) moves to the sidelines as its last meeting for 2020.
AUD/USD Rate Fails to Test of 2020 High Ahead of Australia GDP Report
AUD/USD lags behind is New Zealand counterpart as NZD/USD trades to fresh yearly highs in November, and the Australian Dollar may trade within a defined range over the coming days as Australia’s GDP report is anticipated to show the growth rate contracting 4.4% in the third quarter of 2020 following the 6.3% decline during the previous period.
It remains to be seen if the data print will influence the monetary policy outlook as the RBA remains “prepared to do more if necessary,” and the central bank may continue to endorse a dovish forward guidance in 2021 as the “recovery is still expected to be uneven and drawn out.”
However, the RBA may carry out a wait-and-see approach after laying out plans to purchase “$100 billion of government bonds of maturities of around 5 to 10 years over the next six months,” and key market trends look persist throughout the remainder of the year as Governor Philip Lowe and Co. acknowledge that “theimprovement in risk sentiment has also been associated with a depreciation of the US dollar and an appreciation ofthe Australian dollar.”
In turn, swings in risk appetite may continue to sway AUD/USD ahead of the last Federal Reserve interest rate decision on December 16, and the tilt in retail sentiment also looks poised to persist as the crowding behavior from earlier this year reappears.
The IG Client Sentiment report shows only 32.11% of traders are net-long AUD/USD, with the ratio of traders short to long standing at 2.11 to 1. The number of traders net-long is 3.26% higher than yesterday and 5.84% higher from last week, while the number of traders net-short is 5.91% lower than yesterday and 11.20% higher from last week.
The rise in net-short position comes as AUD/USD struggles to test the yearly high (0.7414), while the rise in net-long interest has done little to alleviate the tilt in retail sentiment as 33.82% of traders were net-long the pair last week.
With that said, the correction from the yearly high (0.7414) may turn out to be an exhaustion in the bullish trend rather than a change in behavior as the RBA moves to the sidelines ahead of 2021, and key market trends may keep the exchange rate afloat as the US Dollar broadly reflects an inverse relationship with investor confidence.
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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) in July even though the RSI failed to retain the upward trend from earlier this year, with the exchange rate pushing to fresh yearly highs in August and September to trade at its highest level since 2018.
- The RSI instilled a bullish outlook for AUD/USD during the same period as it threatened the downward trend from earlier this year to push into overbought territory for the fourth time in 2020, but a textbook sell-signal emerged as the indicator quickly slipped back below 70.
- The RSI established a downward trend in September as the indicator fell to its lowest level since April, but the bearish momentum has abated as the RSI failed to push into oversold territory to reflect the extreme readings seen in March.
- As a result, it seems as though the correction from the yearly high (0.7414) was an exhaustion in the bullish trend rather than a change in behavior as AUD/USD cleared the October high (0.7243) in November, with the move back above the 0.7270 (23.6% expansion) region bringing the Fibonacci overlap around 0.7370 (38.2% expansion) to 0.7390 (38.2% expansion) on the radar.
- However, AUD/USD appears to have marked a failed attempt to test the yearly high (0.7414) as the RSI continues to hold below 70 and struggles to reflect the extreme reading from earlier this year.
- AUD/USD may largely mimic the price action from September amid the lack of momentum to close above the Fibonacci overlap around 0.7370 (38.2% expansion) to 0.7390 (38.2% expansion), with a move below the 0.7270 (23.6% expansion) region bringing the 0.7180 (61.8% retracement) area back on the radar.
- Need a close above the Fibonacci overlap around 0.7370 (38.2% expansion) to 0.7390 (38.2% expansion) to open up the 0.7480 (50% expansion) area, with the next region of interest coming in around 0.7560 (50% expansion) to 0.7580 (61.8% expansion).
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— Written by David Song, Currency Strategist
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