Australian Dollar Rates Overview:
- The two major AUD-crosses have started to poke their heads above key technical resistance, suggesting that the recent consolidations in August will yield bullish breakouts.
- The September RBA rate decision and Q2’20 Australia GDP report should bring a boost to volatility in AUD/JPY and AUD/USD rates this week.
- Ahead of the September RBA meeting and Q2’20 Australia GDP report, the IG Client Sentiment Index suggests that the AUD-crosses have a mixed trading bias.
Australian Dollar Awaits RBA Meeting, Q2’20 GDP
In what seemed like a quiet month, the Australian Dollar grinded higher in the second half of August to post +3.31% and +3.37% gains in AUD/USD and AUD/JPY rates, respectively. Buoyed by the same forces that have lifted global equity markets – hope that the coronavirus pandemic is subsiding, coupled with ongoing stimulus efforts from governments and major central banks – the Australian Dollar has become a favored vehicle for speculation in the FX world.
As the September Reserve Bank of Australia meeting and Q2’20 Australia GDP reports come into focus, however, this ‘slow but steady’ pace in the AUD-crosses may give way to more volatility as market participants shake off their summer doldrums. First up: the September RBA meeting on Tuesday, the first day of the month.
RBA Enacting Yield Curve Control, Rates to Stay on Hold
The Reserve Bank of Australia’s September policy meeting isn’t expect to rock the boat on the interest rate front, which isn’t a surprise: the RBA has already dropped its main overnight interest to an all-time low of 0.25%, implemented its own quantitative easing (QE) program, and is issuing forward guidance to keep the three-year bond yield at 0.25% for the next three years (from March 2020).
RESERVE BANK OF AUSTRALIA INTEREST RATE EXPECTATIONS (TABLE 1) (AUGUST 31, 2020)
According to Australia overnight index swaps, there is a 51% chance of a 25-bps rate cut at the September RBA meeting. But as the commentary from RBA Governor Lowe would suggest, the central bank is not ready to move rates into negative territory, making any further rate cuts unlikely; the pricing may be a quirk due to the shape of the Australian bond yield curve.
Yet with the RBA recently noting that it “has not ruled out adjusting [the stimulus] package if circumstances warranted,” it may be the case that the RBA makes adjustment to some of its extraordinary easing efforts rather than implementing a rate cut to bring the main to zero percent. Enhancing QE, however, may not derail the Australian Dollar.
AUD/USD RATE TECHNICAL ANALYSIS: DAILY CHART (August2019 to August 2020) (CHART 1)
AUD/USD rates may have lost their uptrend from the March coronavirus pandemic low, but the nascent head and shoulders pattern has been busted. To this end, AUD/USD rates continue to gain traction through the descending trendline from the October 2013 and January 2018 highs, with bullish momentum firming up: rates are above the daily 5-, 8-, 13-, and 21-EMA; daily MACD is trending higher in bullish territory; and Slow Stochastics have reached overbought territory. Having cleared out the 0.7100/50 area, the near-term structure has improved materially – even if the September RBA meeting proves to be a burden.
IG Client Sentiment Index: AUD/USD RATE Forecast (August 31, 2020) (Chart 2)
AUD/USD: Retail trader data shows 33.20% of traders are net-long with the ratio of traders short to long at 2.01 to 1. The number of traders net-long is 37.23% higher than yesterday and 21.83% lower from last week, while the number of traders net-short is 0.46% lower than yesterday and 19.51% higher 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 less net-short than yesterday but more 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 (MARCH 2016 to AUGUST 2020) (CHART 3)
AUD/JPY rates have broken out of the ascending triangle in place since the beginning of June, and have punched through the dynamic support and resistance band in the 76.30 to 77.55 area (which has proven challenging to markets since January 2019). Even though the uptrend from the coronavirus pandemic low now broken, momentum has strengthened in AUD/JPY rates (similar to AUD/USD rates). Breaking above the descending trendline from the November 2014 and January 2018 highs is a good omen for further bullish price action moving forward.
IG Client Sentiment Index: AUD/JPY Rate Forecast (August 31, 2020) (Chart 4)
AUD/JPY: Retail trader data shows 46.55% of traders are net-long with the ratio of traders short to long at 1.15 to 1. The number of traders net-long is 6.90% lower than yesterday and 28.57% higher from last week, while the number of traders net-short is 2.45% lower than yesterday and 15.20% lower 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.
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/JPY trading bias.
--- Written by Christopher Vecchio, CFA, Senior Currency Strategist
