Australian Dollar Talking Points
AUD/USD carves a series of higher highs and lows as it continues to bounce back from the 50-Day SMA (0.7713), and the exchange rate may stage a larger rebound ahead of the Reserve Bank of Australia (RBA) meeting on June 1 amid the string of failed attempts to test the monthly low (0.7675).
AUD/USD Rate Outlook Hinges on RBA Interest Rate Decision for June
AUD/USD appears to be benefitting from the Reserve Bank of New Zealand (RBNZ) interest rate decision as Governor Adrian Orr and Co. unveil projections for a rate hike in the second half of 2022, and it remains to be seen if the RBA will also adjust the forward guidance for monetary policy as the central bank acknowledges that “the economic recovery in Australia has been stronger than expected.”
The RBA may show a greater willingness to switch gears as “the Bank’s central scenario for GDP growth has been revised up further, with growth of 4¾ per cent expected over 2021 and 3½ per cent over 2022,” and Governor Philip Lowe and Co. may lay out a more detailed exit strategy over the coming months as “the date for final drawings under the Term Funding Facility is 30 June 2021.”
Until then, AUD/USD may continue to negate the head-and-shoulders formation established earlier this year as it clears the March high (0.7849) in May, and the recent flip in retail sentiment may coincide with a further appreciation in the exchange rate to mimic thebehavior from earlier this year.
The IG Client Sentiment report shows 46.45% of traders are currently net-long AUD/USD, with the ratio of traders short to long standing at 1.15 to 1.
The number of traders net-long is 8.62% lower than yesterday and 0.10% higher from last week, while the number of traders net-short is 3.29% higher than yesterday and unchanged from last week. The marginal rise in net-long position comes as AUD/USD carves a series of higher highs and lows, but the tilt in retail sentiment looks poised to persist as 48.24% of traders were net-long the pair during the previous week.
With that said, the decline from the February high (0.8007) may turn out to be a correction in the broader trend rather than a change in AUD/USD behavior as the crowding behavior carried over from 2020 resurfaces,and the exchange rate may stage a larger rebound ahead of the RBA rate decision amid the string of failed attempts to test the monthly low (0.7675).
AUD/USD Rate Daily Chart
Source: Trading View
- A head-and-shoulders formation took shape as AUD/USD traded to a fresh yearly low (0.7532) in April, but the exchange rate has largely negated the key reversal pattern following the failed attempts to close below the neckline around 0.7560 (50% expansion) to 0.7570 (78.6% retracement).
- The Relative Strength Index (RSI)showed a similar dynamic as the oscillator reversed course ahead of oversold territory to break out of the downward trend from earlier this year, and the decline from the February high (0.8007) may turn out to be a correction in the broader trend rather than a change in market behavior as AUD/USD out the March high (0.7849) in May.
- AUD/USD carve a series of higher highs and lows following the string of failed attempts to test the monthly low (0.7675), but need a close above the Fibonacci overlap around 0.7720 (38.2% expansion) to 0.7760 (23.6% expansion) to bring the 0.7880 (38.2% expansion) area 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), which largely lines up with the February high (0.8007).
— Written by David Song, Currency Strategist
Follow me on Twitter at @DavidJSong