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Weekly Australian Dollar Technical Forecast: Decision Time for AUD/JPY & AUD/USD?

Weekly Australian Dollar Technical Forecast: Decision Time for AUD/JPY & AUD/USD?

2020-08-23 14:30:00
Christopher Vecchio, CFA, Senior Strategist
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Technical Forecast for the Australian Dollar: Neutral

  • The two major AUD-crosses have stalled in key technical zones, suggesting that AUD/JPY and AUD/USD could go either way. Patience is required.
  • There are no ‘medium’ or ‘high’ rated events on the DailyFX Forex Economic Calendar this week for Australia, suggesting that event risk and thus breakout risk is low – particularly in context of the time of year.
  • The IG Client Sentiment Index suggests that the AUD-crosses have a neutral bias tilting towards bullish.
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Australian Dollar Rates Week in Review

Last week proved to be a mixed bag for the Australian Dollar, with several crosses posting modest losses, others posting doji candles, and some scratching out minor gains. AUD/NZD rates eased off by a mere -0.12%, while AUD/JPY rates, the biggest mover, fell by -0.89%. GBP/AUD rates added +0.18% while EUR/AUD rates dropped by -0.23%. A similar story emerged for AUD/USD rates, which by -0.16%.

What was an uneventful week may be a precursor to the week ahead. There are no ‘medium’ or ‘high’ rated events on the DailyFX Forex Economic Calendar this week for Australia, suggesting that event risk and thus breakout risk is low – particularly in context of the end of the summer, one of the lower volatility periods of the entire year (next to the week between Christmas Eve and New Year’s Day, Thanksgiving week in the United States, and the weeks around Easter).

AUD/USD RATE TECHNICAL ANALYSIS: DAILY CHART (December 2018 to August 2020) (CHART 1)

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AUD/USD rates have lost their uptrend from the March coronavirus pandemic low, and have started to flag if not carve out what could be considered a potential head and shoulder’s pattern on the daily timeframe. For now, however, with AUD/USD rates struggling to gain traction through the descending trendline from the July 2014 and January 2018 highs, it would appear that the bullish technical structure is facing a stress test in the near future. Yet that may need to wait until the calendar turns to September; nevertheless, traders should be vigilant to see how AUD/USD rates deal with the 0.7100/50 area over the coming week.

IG Client Sentiment Index: AUD/USD RATE Forecast (August 21, 2020) (Chart 2)

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AUD/USD: Retail trader data shows 43.83% of traders are net-long with the ratio of traders short to long at 1.28 to 1. The number of traders net-long is 2.48% lower than yesterday and 2.14% higher from last week, while the number of traders net-short is 1.78% lower than yesterday and 13.88% lower from last week.

We typically take a contrarian view to crowd sentiment, and the fact traders are net-short suggests AUD/USD prices may continue to rise.

Positioning is more net-short than yesterday but less net-short from last week. The combination of current sentiment and recent changes gives us a further mixed AUD/USD trading bias.

AUD/JPY RATE TECHNICAL ANALYSIS: DAILY CHART (DECEMBER 2017 to AUGUST 2020) (CHART 3)

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AUD/JPY rates have been consolidating in an ascending triangle since the beginning of June, and have found themselves once more capped by a familiar zone: the dynamic support and resistance band in the 76.30 to 77.55 area, which has proven itself a nuisance to traders going back to January 2019. To this end, with the uptrend from the coronavirus pandemic low now broken, momentum has proven weaker in AUD/JPY rates. As is the case with AUD/USD, the end of the summer (effectively) is not fertile ground high volatility or elevated trading volumes, making the likelihood of a breakout developing depressed for the time being.

IG Client Sentiment Index: AUD/JPY Rate Forecast (August 21, 2020) (Chart 4)

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AUD/JPY: Retail trader data shows 35.61% of traders are net-long with the ratio of traders short to long at 1.81 to 1. The number of traders net-long is 6.35% lower than yesterday and 0.56% lower from last week, while the number of traders net-short is 1.59% higher than yesterday and 9.97% higher from last week.

We typically take a contrarian view to crowd sentiment, and the fact traders are net-short suggests AUD/JPY 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 AUD/JPY-bullish contrarian trading bias.

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--- Written by Christopher Vecchio, CFA, Senior Currency Strategist

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