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AUD/USD RSI Sits in Overbought Zone Ahead of Australia Jobs Report

AUD/USD RSI Sits in Overbought Zone Ahead of Australia Jobs Report

David Song, Strategist

Australian Dollar Talking Points

AUD/USD trades to a fresh yearly high (0.7577) ahead of the update to Australia’s Employment report, and recent developments in the Relative Strength Index (RSI) indicates a further appreciation in the exchange rate as the indicator pushes into overbought territory.

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AUD/USD RSI Sits in Overbought Zone Ahead of Australia Jobs Report

AUD/USD extends the series of higher highs and lows from the previous week as the US Dollar continues to reflect an inverse relationship with investor confidence, and fresh data prints coming out of Australia may keep the exchange rate afloat as employment is expected to increase for the second consecutive month.

Image of DailyFX economic calendar for Australia

Australia is expected to add 50.0K in November following the 178.8K expansion the month prior, and the ongoing improvement in the labor market may keep the Reserve Bank of Australia (RBA) on the sidelines in 2021 as the “the economic news has, on balance, been better than we were expecting.

It seems as though the RBA will rely on its current tools to support the economy the central bank insists that “we are still of the view that a negative policy interest rate in Australia is extraordinarily unlikely, with any benefits being outweighed by the costs, and key market trends may continue to influence AUD/USD ahead of the next RBA meeting on February 1 as Governor Philip Lowe and Co. acknowledge that “the improvement in risk sentiment has also been associated with a depreciation of the US dollar and an appreciation of the Australian dollar.”

In turn, swings in risk sentiment may sway AUD/USD throughout the remainder of the year, and the tilt in retail sentiment also looks poised to persist as the crowding behavior from earlier this year reappears.

Image of IG Client Sentiment for AUD/USD rate

The IG Client Sentiment report shows only 30.73% of traders are net-long AUD/USD, with the ratio of traders short to long standing at 2.25 to 1.

The number of traders net-long is 18.53% higher than yesterday and 0.91% higher from last week, while the number of traders net-short is 12.29% higher than yesterday and 26.36% higher from last week. The rise in net-long position comes as AUD/USD trades to a fresh yearly high (0.7577), while the pickup in net-short interest has spurred a further tilt in retail sentiment as 35.93% of traders were net-long the pair last week.

With that said, key market trends may continue to influence AUD/USD as the US Dollar broadly reflects an inverse relationship with investor confidence, and the exchange rate may continue to carve a series of higher highs and lows as the Relative Strength Index (RSI) pushes into overbought territory to show the bullish momentum gathering pace.

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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 has abated as the indicator failed to push into oversold territory to reflect the extreme readings seen in March.
  • As a result, the correction from the September high (0.7414) proved to be an exhaustion in the bullish trend rather than a change in behavior as AUD/USD cleared the October high (0.7243) in November, with the exchange rate trading to fresh yearly highs in December.
  • Recent developments in the RSIshowed the bullish momentum gathering pace as the indicator pushed into overbought territory for the first time since September, with the break above 70 accompanied by a further appreciation in AUD/USD like the behavior seen earlier this year.
  • Need a break/close above the Fibonacci overlap around 0.7560 (50% expansion) to 0.7580 (61.8% expansion) to bring the June 2018 high (0.7677) on the radar, with the next region of interest coming in around 0.7720 (78.6% expansion) to 0.7740 (61.8% expansion), which is followed by the April 2018 high (0.7813).
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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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