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AUD/USD Rebound to Gather Pace as RSI Shows Bearish Momentum Abating

AUD/USD Rebound to Gather Pace as RSI Shows Bearish Momentum Abating

2020-10-01 05:00:00
David Song, Strategist
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Australian Dollar Talking Points

AUD/USD extends the rebound from the September low (0.7006) as the Relative Strength Index (RSI) reverses from oversold territory, and the indicator may show the bearish momentum abating as it appears to be on the cusp of snapping the downward trend carried over from the previous month.

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AUD/USD Rebound to Gather Pace as RSI Shows Bearish Momentum Abating

AUD/USD extends the series of higher highs and lows from earlier this week to largely track the recovery in global equity prices, and a further improvement in investor confidence may prop up the exchange rate as key market trends look poised to persist in October.

Meanwhile, looming developments in the RSI may indicate that the pullback from the yearly high (0.7414) was an exhaustion in the bullish price action rather than a change in trend as the oscillator threatens trendline resistance and appears to be breaking out of the downward trend established in September.

Looking ahead, it remains to be seen if the upcoming Reserve Bank of Australia (RBA) meeting will influence the exchange rate as the central bank is expected cut the official cash rate (OCR) to a fresh record low.

Image of ASX 30 Day Interbank Cash Rate Futures

Source: ASX

In fact, the ASX 30 Day Interbank Cash Rate Futuresstill reflect a greater than 60% probability for a rate cut on October 6 even though Treasurer Josh Frydenberg is scheduled to deliver the federal budget update on the same day.

Another round of monetary stimulus may produce headwinds for the Australian Dollar as the RBA relies on its non-standard measures to support the economy, but Governor Philip Lowe and Co. may stick to the sidelines after tweaking the Term Funding Facility (TFF) in September as the government extends fiscal stimulus programs like the Jobkeeper Payment until March 28, 2021.

Until then, swings in trader sentiment may sway AUD/USD as the Federal Reserve’s balance sheet sits at its highest level since June, and the recent shift in retail positioning appears to have been a temporary event like the pullback in the exchange rate as traders turn net-short in October.

Image of IG Client Sentiment for AUD/USD rate

The IG Client Sentiment report shows 48.88% of traders are currently net-long AUD/USD, with the ratio of traders short to long at 1.05 to 1. The number of traders net-long is 13.25% lower than yesterday and 2.30% higher from last week, while the number of traders net-short is 12.61% higher than yesterday and 3.43% higher from last week.

The recent decline in net-long position could be indicative of profit-taking behavior as AUD/USD extends the rebound from the September low (0.7006), but the rise in net-short interest suggests key market trends will persist over the coming days as the crowding behavior from earlier this year appears to be returning.

With that said, the pullback from the yearly high (0.7414) may turn out to be an exhaustion in the bullish price action rather than a change in trend, and the Relative Strength Index (RSI) may show the bearish momentum abating as it appears to be on the cusp of snapping the downward trend carried over from the previous month.

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AUD/USD Rate Daily Chart

Image of AUD/USD rate daily chart

Source: Trading View

  • Keep in mind, the advance from the 2020 low (0.5506) gathered pace as AUD/USD broke out of the April range, with the exchange rate clearing the January high (0.7016) in June as the Relative Strength Index (RSI) pushed into overbought territory.
  • AUD/USD managed to clear the June high (0.7064) in July even though the RSI failed to retain the upward trend from earlier this year, with the exchange rate pushing to fresh yearly highs in August and September to trade at its highest level since 2018.
  • The RSI instilled a bullish outlook for AUD/USD during the same period as it threatened the downward trend from earlier this year to push into overbought territory for the fourth time in 2020, but a textbook sell-signal emerged as the indicator quickly slipped back below 70.
  • The RSI established a downward trend in September as the indicator fell to its lowest level since April, but the bearish momentum seems to be abating as the RSI fails to push into oversold territory to reflect the extreme readings seen in March.
  • Will keep a close eye on the RSI as it comes up against trendline resistance after briefly slipping below 30, with the break of the downward trend indicating that the pullback from the yearly high (0.7414) was an exhaustion in the bullish price action rather than a change in trend.
  • The close back above the Fibonacci overlap around 0.7090 (78.6% retracement) to 0.7140 (23.6% retracement) has pushed AUD/USD up against the 0.7180 (61.8% retracement) region, with the next area of interest coming in around 0.7270 (23.6% expansion).
  • Need a break/close above 0.7270 (23.6% expansion) to bring the 2020 high (0.7414) back on the radar, which largely lines up with the overlap around 0.7370 (38.2% expansion) to 0.7390 (38.2% expansion).
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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.

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