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AUDUSD Risks Larger Rebound as RBA Tames Bets for Rate Cutting Cycle

AUDUSD Risks Larger Rebound as RBA Tames Bets for Rate Cutting Cycle

David Song,
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Australian Dollar Talking Points

AUD/USD extends the advance from the May-low (0.6865) even though the Reserve Bank of Australia (RBA) cuts the official cash rate (OCR) to a fresh record-low, and recent price action raises the risk for a larger rebound as the exchange rate carves a series of higher highs and lows.

AUDUSD Risks Larger Rebound as RBA Tames Bets for Rate Cutting Cycle

AUD/USD remains bid following Australia’s Gross Domestic Product (GDP) report as the economy expands 1.8% per annum during the first-quarter of 2019, and the updates may do little to sway the RBA as “the economic outlook remains reasonable, with the main downside risk being the international trade disputes.”

Comments following the 25bp rate cut suggest the RBA is in no rush to reestablish its monetary easing cycle as the “Australian economy is still expected to strengthen later this year,” and it seems as though the central bank will revert back to a wait-and-see approach at the next meeting on July 2 as Governor Philip Lowe insists that the “decision does not reflect a weaker outlook.”

Image of rba official cash rate

It remains to be seen if the RBA will continue to alter the forward guidance for monetary policy as the U.S. and China, Australia’s largest trading partner, struggle to reach a trade deal, and the central bank may continue to insulate the economy over the coming months as Governor Lowe warns that the “latest set of forecasts were prepared on the assumption that the cash rate would follow the path implied by market pricing, which was for the cash rate to be around 1 per cent by the end of the year.”

Until then, AUDUSD stands at risk for a larger rebound as the RBA tames speculation for a series of rate cuts, but the pickup in volatility appears to be shaking up market participation, with retail sentiment narrowing from an extreme reading.

Image of IG client sentiment for audusd

The IG Client Sentiment Report shows58.4% of traders are now net-long AUD/USD compared to 69.4% last week, with the ratio of traders long to short at 1.40 to 1. Note that the percentage of traders net-long is now its lowest since April 17 when AUDUSD traded near 0.7170. The number of traders net-long is 11.7% lower than yesterday and 23.5% lower from last week, while the number of traders net-short is 10.0% higher than yesterday and 24.3% higher from last week.

The tilt remains in the sentiment index, with the decline in net-long position pointing to profit-taking behavior, but the rise in net-short interest warns of a potential shift in retail sentiment amid the threat of a US China trade war. Nevertheless, recent price action in AUDUSD raises the risk for a larger rebound as the exchange rate breaks out of a narrow range and carves a series of higher highs and lows.

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AUD/USD Rate Daily Chart

Image of audusd daily chart
  • Keep in mind, the AUDUSD rebound following the currency market flash-crash has been capped by the 200-Day SMA (0.7125), with the exchange rate marking another failed attempt to break/close above the moving average in April.
  • In turn, AUDUSD 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.
  • However, failure to break/close below the Fibonacci overlap around 0.6850 (78.6% expansion) to 0.6880 (23.6% retracement) has spurred a rebound in AUDUSD, with the recent series of higher highs & lows bringing the 0.7020 (50% expansion) region on the radar.
  • Next topside hurdle comes in around 0.7080 (61.8% retracement) to 0.7110 (78.6% retracement), which largely overlaps with trendline resistance as well as the 200-Day SMA (0.7125).
  • Will keep a close eye on the RSI as it continues to bounce back from oversold territory and extends the bullish formation carried over from the previous month.

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--- Written by David Song, Currency Strategist

Follow me on Twitter at @DavidJSong.

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.