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Australian Dollar Talking Points

AUD/USD has gapped higher following the Federal election, but attention now turns to the Reserve Bank of Australia (RBA) Minutes, with the Aussie Dollar exchange rate at risk of facing a more bearish fate as the central bank shows a greater willingness to further insulate the economy.

Post-Election AUDUSD Rebound Susceptible to Dovish RBA Minutes

The Australian dollar appears to be catching a bid with Prime Minister Scott Morrison on track to implement tax cuts and boost infrastructure spending, but it remains to be seen if the upcoming changes in fiscal policy will deter the RBA from reestablishing its easing-cycle as the central bank warns ‘that a further improvement in the labour market was likely to be needed for inflation to be consistent with the target.

The RBA Minutes may reveal a further change in the forward-guidance for monetary policy as ‘the inflation data for the March quarter were noticeably lower than expected,’ and Governor Philip Lowe & Co. may prepare Australian households and businesses for lower interest rates as private-sector consumption continues to be ‘affected by a protracted period of low income growth and declining housing prices.

In turn, a batch of dovish comments is likely to drag on AUD/USD as it fuels bets for an imminent rate-cut, with the Australian Dollar at risk of facing headwinds ahead of the next RBA meeting on June 4 especially as the U.S. and China, Australia’s largest trading partner, struggle to reach a trade agreement, but the recent rebound in the Aussie Dollar exchange rate appears to be spurring a shift in market participation as retail sentiment comes off an extreme reading.

Image of IG client sentiment

The IG Client Sentiment Report shows75.1% of traders are net-long AUD/USD, with the ratio of traders long to short at 3.01 to 1. In fact, traders have been net-long since April 18 when AUD/USD traded near 0.7160 even though price has moved 3.7% lower since then. The number of traders net-long is 7.3% lower than yesterday and 0.1% higher from last week, while the number of traders net-short is 29.9% higher than yesterday and 32.6% higher from last week.

The last time the sentiment index showed a similar dynamic was just ahead of the currency market flash-crash in January, with net-long exposure still heavily skewed ahead of the RBA Minutes. A further pickup in net-long interest may continue to offer a contrarian view as AUD/USD struggles to retain the rebound from the 2019-low (0.6745), but recent price action also appears to be spurring a rise in in net-short interest as Aussie Dollar gaps higher following the election.

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AUD/USD Rate Daily Chart

Image of audusd daily chart
  • Keep in mind, the AUD/USD rebound following the currency market flash-crash has been capped by the 200-Day SMA (0.7146), with the exchange rate marking another failed attempt to break/close above the moving average in April.
  • In turn, AUD/USD remains at risk of giving back the rebound from the 2019-low (0.6745) as the wedge/triangle formation in both price and the Relative Strength Index (RSI) unravels, with the Fibonacci overlap around 0.6850 (78.6% expansion) to 0.6880 (23.6% retracement) still on the radar the exchange rate struggles to push back above the 0.6950 (61.8% expansion) pivot.
  • Next downside hurdle comes in around 0.6730 (100% expansion), but will keep a close eye on the RSI as the oscillator bounces back from oversold territory, with the development warning of a larger rebound in the Aussie Dollar exchange rate.

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--- Written by David Song, Currency Strategist

Follow me on Twitter at @DavidJSong.