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Australian Dollar Talking Points

AUD/USD may face range-bound conditions as it pares the sharp decline from earlier this week, but recent price action keeps the near-term outlook tilted to the downside as the exchange rate extends the string of lower highs & lows from earlier this week.

Image of daily change for major currencies

AUD/USD Rate Eyes July-Low as Bearish Sequence Takes Shape

Image of daily change for AUDUSD

With the broader outlook for AUD/USD mired by the threat of a trade war between the U.S. and China, growing tensions between the two regions may continue to drag on the aussie-dollar exchange rate as U.S. Treasury Secretary Steven Mnuchin warns many trade talks with Australia’s largest trading partner have ‘broken down.’

In turn, the Reserve Bank of Australia (RBA) Minutes on tap for the week ahead may continue to highlight a wait-and-see approach for monetary policy as ‘one uncertainty regarding the global outlook stems from the direction of international trade policy in the United States,’ and Governor Philip Lowe & Co. may continue to tame expectations for an imminent rate-hike as ‘the low level of interest rates is continuing to support the Australian economy.

More of the same from the RBA may do little to shore up aussie-dollar as the central bank appears to be on track to retain the record-low cash rate at the next meeting on August 7, and AUD/USD looks to on course to test the monthly-low (0.7311) especially as retail sentiment sits near recent extremes.

Image of IG Client Sentiment for AUDUSD

Recent updates to the IG Client Sentiment Report shows the number of traders net-long AUD/USD is 2.9% lower than yesterday and 7.8% lower from last week, while the number of traders net-short is 6.9% higher than yesterday and 1.6% lower from last week. Despite signs of narrowing interest, traders have been net-long AUD/USD since June 5 when the exchange rate traded near the 0.7573 region even though price has moved 2.1% lower since then.

The skew in retail positioning offers a contrarian view, with the fact that traders are still net-long AUD/USD raising the risk for a run at the monthly-low (0.7311) as a bearish sequence starts to take shape.

AUD/USD Daily Chart

Image of AUDUSD daily chart
  • Keep in mind, the broader outlook for AUD/USD remains tilted to the downside as the pair continues to track the downward trend from earlier this year, with the Relative Strength Index (RSI) still highlighting a similar dynamic.
  • Near-term outlook remains capped by the failed attempt to clear the Fibonacci overlap around 0.7500 (50% retracement) to 0.7530 (38.2% expansion), with the 0.7320 (50% expansion) to 0.7340 (61.8% retracement) region on the radar as it lines up with the July-low (0.7311).

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--- Written by David Song, Currency Analyst

Follow me on Twitter at @DavidJSong.