AUD/USD Outlook Mired Ahead of RBA as RSI Slips into Oversold Zone

Australian Dollar Talking Points

AUD/USD trades at its lowest level since 2009 as the coronavirus casts a weakening outlook for the Asia/Pacific region, and the exchange rate may continue to exhibit a bearish behavior as the Relative Strength Index (RSI) slips into oversold territory.

AUD/USD Outlook Mired Ahead of RBA as RSI Slips into Oversold Zone

AUD/USD extends the decline from earlier this month as the Reserve Bank of Australia (RBA) warns that the coronavirus is “a new source of uncertainty for the global economy,” with the meeting minutes fueling bets for lower interest rates as “members reviewed the case for a further reduction in the cash rate.”

The Australian Dollar may face a more bearish fate ahead of the next RBA meeting on March 3 as the central bank shows a greater willingness to insulate the economy, and Governor Philip Lowe and Co. may reestablish its rate easing cycle over the coming months as “economic growth was expected to be weaker in the near term than had been forecast three months earlier.”

In turn the RBA may continue to endorse a dovish forward guidance as the board remains “prepared to ease monetary policy further if needed,” and AUD/USD may continue to give back the correction from the 2008 low (0.6006) as the Federal Reserve tames speculation for lower US interest rates.

In fact, Fed Fund futures show a greater than 80% probability the Federal Open Market Committee (FOMC) will keep the benchmark interest rate in its current threshold of 1.50% to 1.75% on March 18, and speculation for a wider interest rate disparity between Australia and the US may keep AUD/USD under pressure as China, Australia’s largest trading partner, struggles to contain the coronavirus.

At the same time, recent developments in the Relative Strength Index (RSI) casts a bearish outlook for AUD/USD as the oscillator snaps the bullish formation from earlier this month and slips into oversold territory.

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AUD/USD Rate Daily Chart

Source: Trading View

• Keep in mind, the monthly opening range has been a key dynamic for AUD/USD in the fourth quarter of 2019 as the exchange rate carved a major low on October 2, with monthly high for November occurring during the first full week of the month, while the low for December materialized on the first day of the month.
• The opening range for 2020 showed a similar scenario as AUD/USD marked the high of the month on January 2, and recent price action keeps the downside on the radar as the exchange rate clears the 2019 low (0.6671).
• As a result, AUD/USD maycontinue to give back the correction from the 2008 low (0.6006), with the break/close below the Fibonacci overlap around 0.6620 (100% expansion) to 0.6650 (61.8% expansion) opening up the 0.6510 (161.8% expansion) to 0.6540 (78.6% expansion) region as the exchange rate continues to track the downward trend from earlier this year.
• Will keep a close eye on the RSI as its sits in oversold territory, and the bearish momentum may gather pace over the coming days as long as the oscillator holds below 30.

--- Written by David Song, Currency Strategist

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