AUD/USD Rate to Face Contraction in Australia Employment

Australian Dollar Talking Points

AUD/USD bounces back ahead of the monthly low (0.7308) to defend the opening range for September, but the update to Australia’s Employment report may drag on the exchange rate as job growth is expected to contract for the second time in 2021.

AUD/USD Rate to Face Contraction in Australia Employment

AUD/USD manages to trade above the 50-Day SMA (0.7356) as it attempts to retrace the decline from the previous week, but the negative slope in the moving average casts a bearish outlook for the exchange rate as it trades to fresh yearly lows in the second half of the year.

Looking ahead, fresh data prints coming out of Australia may drag on AUD/USD as employment is projected to fall 90.0K in August, while the jobless rate is expected to widen to 4.9% from 4.6% during the same period. In response, the Reserve Bank of Australia (RBA) may retain the current course for monetary policy as the central bank warns that “the Delta outbreak is expected to delay, but not derail, the recovery,” and Governor Philip Lowe and Co. may stick to the same script at its next interest rate decision on October 5 as “the Board is committed to maintaining highly supportive monetary conditions to achieve a return to full employment in Australia and inflation consistent with the target.”

Until then, signs of a slowing recovery in Australia may weigh on AUD/USD as the RBA plans to carry out its government bond purchase program at a pace of A$4B a week “until at least mid February 2022,” but a further decline in the exchange rate may fuel the recent flip in retail sentiment like the behavior seen earlier this year.

The IG Client Sentiment report shows 51.12% of traders are currently net-long AUD/USD, with the ratio of traders long to short standing at 1.05 to 1.

The number of traders net-long is 6.35% higher than yesterday and 12.93% higher from last week, while the number of traders net-short is 10.45% higher than yesterday and 19.38% lower from last week. The rise in net-long interest has fueled the flip in retail sentiment as 47.18% of traders were net-long AUD/USD last week, while the decline in net-short position comes as the exchange rate bounces back ahead of the monthly low (0.7308).

With that said, AUD/USD may face range bound conditions ahead of Australia’s Employment report as it defends the opening range for September, but the rebound from the August low (0.7106) may turn out to be a correction in the broader trend as it the exchange rate slips to fresh yearly lows in the second half of the year.

AUD/USD Rate Daily Chart

Source: Trading View

• Keep in mind, AUD/USD sits below the 200-Day SMA (0.7604) for the first time in over a year, with the decline from the May high (0.7891) pushing the Relative Strength Index (RSI) into oversold territory for the first time since March 2020.
• As a result, the 50-Day SMA (0.7356) established a negative slope as AUD/USD traded to fresh yearly lows in the second-half of 2021, but the exchange rate has broken out of the descending channel from earlier this year following the failed attempt to close below the 0.7130 (61.8% retracement) to 0.7140 (23.6% expansion) region.
• Nevertheless, the rebound from the August low (0.7106) may turn out to be a correction in the broader trend as AUD/USD tracks the opening range for September, with the failed attempt to test the 0.7500 (50% retracement) handle pushing the exchange rate back below the 0.7370 (38.2% expansion) to 0.7380 (61.8% retracement) region.
• Failure to hold above the 50-Day SMA (0.7356) may send AUD/USD back towards the monthly low (0.7308), with a break/close below the 0.7290 (23.6% expansion) region opening up the Fibonacci overlap around 0.7180 (61.8% retracement) to 0.7210 (78.6% retracement).

--- Written by David Song, Currency Strategist

Follow me on Twitter at @DavidJSong