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AUD/USD Consolidation Takes Shape Following Test of Monthly High

AUD/USD Consolidation Takes Shape Following Test of Monthly High

David Song, Strategist

Australian Dollar Talking Points

AUD/USD trades to a fresh weekly low (0.7255) even though Australia’s Employment report showed an unexpected pickup in job growth, and swings in risk appetite may sway the exchange rate over the remainder of the month as the US Dollar continues to reflect an inverse relationship with investor confidence.

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AUD/USD Consolidation Takes Shape Following Test of Monthly High

AUD/USD continues to consolidate after testing the monthly (0.7340) as the Greenback appreciates on the back of waning risk appetite, and the reserve currency may continue to gain ahead of the virtual Group of 20 (G20) Summit as global cases of COVID-19 climb to 56.4 million according to the recent update provided by John Hopkins University.

Image of John Hopkins University daily COVID-19 cases

Source: John Hopkins University

The recent surge in daily COVID-19 cases are likely to dominate discussions at the G20 Summit as the increasing number of social restrictions across major cities raises the threat for protracted recovery, and the Reserve Bank of Australia (RBA) may keep the door open to further support the economy as “the Board is prepared to do more if necessary.

Image of DailyFX economic calendar for Australia

However, the update to Australia’s Employment report may encourage the RBA to move to the sidelines as the economy adds 178.8K jobs in October versus forecasts for a 27.5K contraction, and Governor Philip Lowe and Co. may merely attempt to buy at its last meeting for 2020 as the central bank plans to purchase “$100 billion of government bonds of maturities of around 5 to 10 years over the next six months.

In turn, key market themes may continue to influence AUD/USD ahead of the next RBA rate decision on December 1 as the Fed’s balance sheet approaches the record high, and the tilt in retail sentiment may persist throughout the remainder of the month as the crowding behavior from earlier this year reappears.

Image of IG Client Sentiment for AUD/USD rate

The IG Client Sentiment report shows 32.89% of traders are net-long AUD/USD, with the ratio of traders short to long standing at 2.04 to 1. The number of traders net-long is 0.67% lower than yesterday and 10.31% higher from last week, while the number of traders net-short is 2.90% lower than yesterday and 3.40% lower from last week.

The decline in net-short positions could be a function of profit-taking behavior as AUD/USD consolidates after testing the monthly (0.7340), while the rise in net-long interest has helped to alleviate the tilt int retail sentiment as only 30.59% of traders were net-long the pair earlier this week.

Nevertheless, the crowding behavior looks poised to persist even though the US Dollar continues to broadly reflect an inverse relationship in investor confidence, and swings in risk appetite may continue to sway AUD/USD as the threat of a protracted recovery spurs speculation for additional monetary stimulus.

With that said, the correction from the yearly high (0.7414) appears to have been an exhaustion in the bullish trend rather than a change in behavior as it largely preserves the advance from earlier this month, but the exchange rate may continue to consolidate after testing the November high (0.7340) as it fails to extend the series of higher highs and lows from the start of the week.

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 has abated as the RSI failed to push into oversold territory to reflect the extreme readings seen in March.
  • As a result, it seems as though the correction from the yearly high (0.7414) was an exhaustion in the bullish trend rather than a change in behavior as AUD/USD cleared the October high (0.7243) earlier this month, with the move back above the 0.7270 (23.6% expansion) region bringing the Fibonacci overlap around 0.7370 (38.2% expansion) to 0.7390 (38.2% expansion) on the radar.
  • However, AUD/USD may continue to consolidate after testing the monthly (0.7340) as it fails to extend the series of higher highs and lows from the start of the week, with a close below the 0.7270 (23.6% expansion) region bringing the 0.7180 (61.8% retracement) area back on the radar.
  • Need a closing price above the overlap around 0.7370 (38.2% expansion) to 0.7390 (38.2% expansion) to open up the 0.7480 (50% expansion) area, with the next region of interest coming in around 0.7560 (50% expansion) to 0.7580 (61.8% expansion).

--- 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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