Australian Dollar Talking Points
AUD/USD eyes the July 2019 high (0.7082) after taking out the December high (0.7032), but the eight day advance may sputter over the coming days as the Relative Strength Index (RSI) falls back from its highest reading since 2018.
AUD/USD Rate Eyes July 2019 High as Overbought RSI Reading Persists
The Australian Dollar has outperformed against all of its major counterparts in May, and the bullish behavior may persist in June as the exchange rate extends the series of higher highs and lows from the previous week.
At the same time, the RSI sits in overbought territory, with the appreciation in AUD/USD pushing the oscillator to its highest level since 2018, but the indicator may offer a textbook sell signal over the coming days if it breaks below 70.
Nevertheless, the ongoing shift in the forward guidance for monetary policy may keep the Australian Dollar afloat as the Reserve Bank of Australia (RBA) keeps the official cash rate (OCR) at the record low of 0.25% and tames speculation for additional monetary support.
It seems as though the RBA will carry out a wait-and-see approach throughout the remainder of the year as “the Board will not increase the cash rate target until progress is being made towards full employment,” and Governor Philip Lowe and Co. may merely buy time at the next meeting on July 7 as “the substantial, coordinated and unprecedented easing of fiscal and monetary policy in Australia is helping the economy through this difficult period.”
In turn, the RBA may continue to drop the dovish tone as “it is possible that the depth of the downturn will be less than earlier expected,” but the gradual process in reopening the Australian economy may put pressure on the central bank to implement more non-standard measures as “it is likely that this fiscal and monetary support will be required for some time.”
With that said, the threat of a protracted recovery may force the RBA to act as stimulus programs like the Jobkeeper Payment is set to expire on September 27, and the Australian Dollar is likely to face headwinds if Governor Lowe and Co. revert back to a dovish forward guidance.
Nevertheless, current market conditions may keep AUD/USD afloat as the Federal Reserve expands the Main Street Lending Program, and the Australian Dollar may continue to outperform its US counterparts in June as the RBA alters the forward guidance for monetary policy.
As a result, AUD/USD may work its way towards the July 2019 high (0.7082) as the exchange rate extends the series of higher highs and lows from the previous week, while the RSI sits in overbought territory.
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AUD/USD Rate Daily Chart
Source: Trading View
- Keep in mind, the monthly opening range was a key dynamic for AUD/USD in the fourth quarter of 2019 as the exchange rate carved a major low on October 2, with the 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, with the exchange rate carving the February high during the first week of the month.
- However, the opening range for March was less relevant, with the high of the month occurring on the 9th, the same day as the flash crash.
- Nevertheless, the advance from the yearly low (0.5506) gathered pace as AUD/USD broke out of the April range, with the exchange rate clearing the February high (0.6774) as the Relative Strength Index (RSI) pushes into overbought territory.
- The bullish behavior in AUD/USD may persist as long as the oscillator sits in overbought territory, but the indicator may offer a textbook sell signal over the coming days if it breaks below 70.
- Nevertheless, the break/close above the 0.6970 (23.6% expansion) to 0.6980 (23.6% expansion) region opens up the July 2019 high (0.7082), which largely lines up with the 0.7090 (78.6% retracement) hurdle, with the next area of interest coming in around 0.7140 (23.6% expansion) to 0.7180 (61.8% expansion).
--- Written by David Song, Currency Strategist
Follow me on Twitter at @DavidJSong
