AUD/USD Outlook Mired by Failure to Push Back Above September Low

Australian Dollar Talking Points

AUD/USD retraces the decline following the weaker-than-expected Australia Employment report to trade to a fresh weekly high (0.6356), but the recovery from the yearly low (0.6170) may end up being short-lived as the exchange rate struggles to push back above the September low (0.6363).

AUD/USD Outlook Mired by Failure to Push Back Above September Low

Recent price action in AUD/USD raises the scope for a larger rebound as it bounces back ahead of the weekly low (0.6203), and the exchange rate may attempt to retrace the decline from the monthly high (0.6547) as the Relative Strength Index (RSI) continues to recover from oversold territory.

However, AUD/USD may track the negative slope in the moving average as the smaller-than-expected rise in Australia Employment puts pressure on the Reserve Bank of Australia (RBA) to winddown its hiking-cycle, and the central bank may indicate a looming shift in monetary policy as the minutes from the October meeting reveal that “a smaller increase than that agreed at preceding meetings was warranted given that the cash rate had been increased substantially in a short period of time.”

As a result, AUD/USD may face headwinds ahead of the next RBA meeting on November 1 as the Federal Reserve’s Summary of Economic Projections (SEP) reflects a steeper path for US interest rates, and speculation for another 75bp Fed rate hike may undermine the recent rebound in the exchange rate as Governor Philip Lowe and Co. show no interest in carrying out a restrictive policy.

Nevertheless, AUD/USD may stage a larger recover the coming days as it attempts to breakout of the range-bound price action carried over from last week, and a larger rebound in the exchange rate may continue to alleviate the tilt in retail sentiment like the behavior seen earlier this year.

The IG Client Sentiment (IGCS) report shows 68.77% of traders are currently net-long AUD/USD, with the ratio of traders long to short standing at 2.20 to 1.

The number of traders net-long is 6.53% lower than yesterday and 10.15% lower from last week, while the number of traders net-short is 13.81% higher than yesterday and 68.32% higher from last week. The decline in net-long interest has helped to alleviate the tilt in retail sentiment as 72.32% of traders were net-long AUD/USD earlier this week, while the jump in net-short position comes as the exchange rate attempts to breakout of the range-bound price action carried over from last week.

With that said, a move above the September low (0.6363) may lead to larger rebound in AUD/USD as the bearish momentum abates, but the recovery from the yearly low (0.6170) may end up being short-lived as the exchange rate appears to be tracking the negative slope in the 50-Day SMA (0.6652).

AUD/USD Rate Daily Chart

Source: Trading View

• AUD/USD trades in a defined range after failing to test the 0.6120 (78.6% retracement) to 0.6160 (100% expansion) region, but the exchange rate attempt to breakout of the range bound price action as the Relative Strength Index (RSI) recovers from oversold territory.
• A move above the 0.6370 (78.6% expansion) area may push AUD/USD towards the monthly high (0.6547), with a break/close above the Fibonacci overlap around 0.6460 (61.8% retracement) to 0.6530 (61.8% expansion) opening up the 0.6650 (50% expansion) region.
• However, lack of momentum to push above the 0.6370 (78.6% expansion) area may keep AUD/USD within a defined range, and the advance from the yearly low (0.6170) may end up being short-lived as the exchange rate struggles to push back above the September low (0.6363).
• Failure to hold above the 0.6120 (78.6% retracement) to 0.6160 (100% expansion) region brings the 0.6020 (50% expansion) to 0.6040 (78.6% retracement) zone on the radar, with the next area of interest coming in around the April 2020 low (0.5980).

— Written by David Song, Currency Strategist

Follow me on Twitter at @DavidJSong