AUD/USD Extends Bullish Series Ahead RBA Financial Stability Review

Australian Dollar Talking Points

AUD/USD is little changed despite the below-forecast print for the U.S. Producer Price Index (PPI), but recent price action raises the risk for larger rebound in the exchange rate as aussie-dollar extends the bullish sequence from earlier this week.

AUD/USD Extends Bullish Series Ahead RBA Financial Stability Review

Fresh developments coming out of the U.S. economy may do little to alter the near-term outlook for AUD/USD as updates to the Consumer Price Index (CPI) are anticipated to show the headline reading for inflation slipping to 2.4% from 2.7% per annum in August, and another batch of lackluster data prints may fuel a larger rebound in aussie-dollar as it limits the Federal Reserve’s scope to extend the hiking-cycle.

Keep in mind, the Federal Open Market Committee (FOMC) appears to be on a preset course in 2018 as Chairman Jerome Powell & Co. are widely anticipated to deliver another 25bp rate-hike at the next quarterly meeting in December, and Fed officials may continue to prepare U.S. households and businesses for higher borrowing-costs as the central bank achieves its dual mandate for monetary policy.

However, the narrowing threat for above-target price growth may force the FOMC to soften its hawkish forward-guidance for monetary policy as ‘both overall inflation and inflation for items other than food and energy remain near 2 percent,’ and Fed officials may continue to project a longer-run neutral rate of 2.75% to 3.00% especially as the shift in U.S. trade policy clouds the economic outlook.

With that said, the recent rebound in AUD/USD may gather pace over the coming days, but the broader outlook remains mired by the Reserve Bank of Australia’s (RBA) wait-and-see approach for monetary policy as the central bank remains reluctant to lift the official cash rate (OCR) off of the record-low.

In turn, the RBA’s Financial Stability Review is likely to have a limited impact on the local currency as Governor Philip Lowe & Co. show little to no interest in altering the outlook for monetary policy, and the central bank may merely attempt to buy more time at the next meeting on November 6 as ‘the low level of interest rates is continuing to support the Australian economy.’ Moreover, the IG Client Sentiment Report shows retail interest back at extremes as73.1% of traders are net-long AUD/USD, with the ratio of traders long to short at 2.72 to 1.

In fact, traders have remained net-long since September 24 when AUD/USD traded near 0.727o even though price has moved 2.4% lower since then. The number of traders net-long is 4.1% lower than yesterday and 17.3% higher from last week, while the number of traders net-short is 3.9% lower than yesterday and 27.7% lower from last week. The skew in retail sentiment provides a contrarian view to crowd sentiment, with the broader outlook for AUD/USD still 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 may continue to abate as the RSI snaps back ahead of oversold territory, with the failed attempt to break below 30 raising the risk for a larger recovery 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

• The near-term outlook for AUD/USD remains capped by the 0.7320 (50% expansion) to 0.7340 (61.8% retracement) region, but the failed attempt to test the 0.7020 (50% expansion) hurdle raises the risk for a larger rebound as the exchange rate extends the series of higher highs & lows from earlier this week.
• A closing price above the 0.7090 (78.6% retracement) to 0.7110 (78.6% retracement) area opens up the Fibonacci overlap around 0.7170 (23.6% expansion) to 0.7180 (61.8% retracement), with the next topside hurdle coming in around 0.7230 (61.8% expansion).

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--- Written by David Song, Currency Analyst

Follow me on Twitter at @DavidJSong.