Australian Dollar Talking Points
AUD/USD extends the decline following the larger-than-expected contraction in Australia employment as fresh data prints coming out of the US fuel speculation for an imminent shift in monetary policy.
AUD/USD Outlook Mired by Deviating Paths Between RBA & FOMC
AUD/USD trades to a fresh monthly low (0.7274) as US Retail Sales unexpectedly increases 0.7% in August, and the exchange rate may face a further decline ahead of the Federal Open Market Committee (FOMC) interest rate decision on September 22 as the central bank appears to be on track to scale back monetary support.
The FOMC may layout a tentative exit strategy as the rise in household consumption indicates a robust recovery, and the update to the Summary of Economic Projections (SEP) may heighten the appeal of the US Dollar if Fed officials show a greater willingness to normalize monetary policy sooner rather than later.
Meanwhile, the Reserve Bank of Australia (RBA) seems to be on a preset course as the central bank plans to carry out its government bond purchase program at a pace of A$4B a week “until at least mid February 2022,” and Governor Philip Lowe and Co. may keep the door open to further support the economy as job growth contracts for the second time this year.
In turn, the diverging paths for monetary policy may keep AUD/USD under pressure as Fed officials project two rate hikes for 2023, 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 54.01% of traders are currently net-long AUD/USD, with the ratio of traders long to short standing at 1.17 to 1.
The number of traders net-long is 2.69% lower than yesterday and 7.65% higher from last week, while the number of traders net-short is 3.83% lower than yesterday and 11.05% lower from last week. The rise in net-long interest has fueled the recent flip in retail sentiment as 51.12% of traders were net-long AUD/USD earlier this week, while the decline in net-short position comes as the exchange rate trades to a fresh monthly low (0.7274).
With that said, the rebound from the August low (0.7106) may turn out to be a correction in the broader trend as it trades back below the 50-Day SMA (0.7347), and the exchange rate may continue to trade to fresh monthly lows ahead of the Fed rate decision as it snaps the opening range for September.
AUD/USD Rate Daily Chart
Source: Trading View
- Keep in mind, AUD/USD sits below the 200-Day SMA (0.7603) 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 (0.7347) established a negative slope as AUD/USD traded to fresh yearly lows in the second-half of 2021, and the rebound from the August low (0.7106) may turn out to be a correction in the broader trend it trades back below the moving average.
- Lack of momentum to test the 0.7500 (50% retracement) handle pushed the exchange rate back below the 0.7370 (38.2% expansion) to 0.7380 (61.8% retracement) region, but need a close below the 0.7290 (23.6% expansion) region to bring the Fibonacci overlap around 0.7180 (61.8% retracement) to 0.7210 (78.6% retracement) on the radar.
- Next area of interest comes in around 0.7130 (61.8% retracement) to 0.7140 (23.6% expansion), with a move below the August low (0.7106) opening up the 0.7060 (61.8% expansion) to 0.7090 (7.8% expansion) region.
--- Written by David Song, Currency Strategist
Follow me on Twitter at @DavidJSong
