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Australian Dollar Talking Points

AUD/USD pares the sharp decline from the previous week, with the exchange rate bouncing back from a fresh yearly low of 0.7041, and recent developments in the Relative Strength Index (RSI) points to a larger recovery as the bearish momentum appears to be abating.

Image of daily change for major currencies

AUD/USD Risks Larger Rebound as RSI Flops Ahead of Oversold Territory

Image of daily change for audusd rate

AUD/USD remains vulnerable ahead of the Reserve Bank of Australia’s (RBA) semi-annual Financial Stability Review as the exchange rate continues to carve a series of lower highs & lows, and the fresh updates from Governor Philip Lowe & Co. may do little to boost the appeal of the local currency as the central bank remains in no rush to lift the official cash rate off of the record-low.

Image of RBA official cash rate

It seems as though the RBA will retain its wait-and-see approach throughout the remainder of the year as Australian households and businesses face rising mortgage costs, and the meeting minutes on tap for October 16 may continue to tame bets for an imminent rate-hike as ‘the low level of interest rates is continuing to support the Australian economy.

In turn, the RBA may merely attempt to buy more time at the next meeting on November 6, and the lack of urgency to alter the monetary policy outlook may continue to produce headwinds for AUD/USD especially as the Federal Reserve appears to be on track to further embark on its hiking-cycle.

Image of IG client sentiment for audusd

At the same time, the IG Client Sentiment Report shows retail sentiment back at extremes as 73.3% of traders are net-long AUD/USD, with the ratio of traders long to short at 2.75 to 1.In fact, traders have remained net-long since September 24 when AUD/USD traded near 0.7270 even though price has moved 2.8% lower since then. The number of traders net-long is 6.1% higher than yesterday and 32.0% higher from last week, while the number of traders net-short is 2.9% higher than yesterday and 36.9% lower from last week.

The skew in retail interest offers a contrarian view to crowd sentiment, with the broader outlook for AUD/USD tilted to the downside as both price and the Relative Strength Index (RSI) continue to track the bearish formations from earlier this year. However, the bearish momentum appears to be abating as the RSI flops ahead of oversold territory, with the failed attempt to break below 30 raising the risk for a larger rebound in the aussie-dollar exchange rate. Sign up and join DailyFX Currency Analyst David Song LIVE for an opportunity to discuss potential trade setups.

AUD/USD Daily Chart

Image of audusd daily chart
  • Near-term outlook for AUD/USD remains capped by the failed attempt to push back above the 0.7320 (50% expansion) to 0.7340 (61.8% retracement) region, with the recent series of lower highs & lows keeping the 0.7020 (50% expansion) hurdle on the radar.
  • However, the recent developments in the RSI raises the risk for a larger rebound in the exchange rate, with a move back above the 0.7090 (78.6% retracement) to 0.7110 (78.6% retracement) area raising the risk for a move back towards the Fibonacci overlap around 0.7170 (23.6% expansion) to 0.7180 (61.8% retracement).
Image of DailyFX economic calendar

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--- Written by David Song, Currency Analyst

Follow me on Twitter at @DavidJSong.