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AUDUSD Analysis and Talking Points

  • China Vows Not to Devalue Yuan
  • Bearish Trend Remains

China Vows Not to Devalue Yuan

Australian Dollar has continued to extend on its recovery from last week’s 2.5yr low (0.7085) with the currency back above 0.7250. Overnight, Chinese Premier Li vowed that no competitive devaluation will take place, consequently providing a lift to the Aussie. Alongside this, the boost in risk sentiment with oil prices tracking higher and a further pullback in the greenback have contributed to the lift in the Australian Dollar.

Further gains in the Australian Dollar pose a threat to the sizeable amount of speculative AUD shorts, which total $3.2bln. This in turn leaves AUDUSD vulnerable to another leg higher as shorts are squeezed, while demand for protection against AUD losses has also continued to recede.

AUD Bulls Extend Recovery, However, Key Resistance Keeps Bearish Trend Intact

Bearish Trend Remains

Despite the notable recovery in the Australian Dollar, the trend remains bearish as key resistance suggests that gains could be limited. The descending trendline from the 2018 peak has yet to be broken with the pair failing to breach this level on several occasions. Elsewhere, further upside targets are situated at 0.7329, which marks the 61.8% Fibonacci retracement of the 0.6827-0.8142 rise.

AUDUSD PRICE CHART: Daily Time Frame (January 2018-September 2018)

AUD Bulls Extend Recovery, However, Key Resistance Keeps Bearish Trend Intact

Chart by IG

Where Next for AUDUSD?

According to IG Client Positioningdata shows 42.6% of traders are net-long with the ratio of traders short to long at 1.34 to 1. The number of traders net-long is 60.5% lower than yesterday and 67.2% lower from last week, while the number of traders net-short is 9.6% higher than yesterday and 35.0% higher from last week.

We typically take a contrarian view to crowd sentiment, and the fact traders are net-short suggests AUDUSD prices may continue to rise. Traders are further net-short than yesterday and last week, and the combination of current sentiment and recent changes gives us a stronger AUDUSD-bullish contrarian trading bias.

--- Written by Justin McQueen, Market Analyst

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Follow Justin on Twitter @JMcQueenFX