Australian Dollar Rates Overview:
- The two major AUD-crosses have once again started to test key technical resistance, suggesting that the consolidations in recent months will finally yield bullish breakouts.
- A tidal wave of global optimism around US elections and coronavirus vaccine development news have boosted demand for growth-linked assets and currencies, groups in which the Australian Dollar finds itself.
- A quieter economic calendar during the US Thanksgiving holiday week coupled with traders looking ahead to next week’s December RBA meeting has produced mixed outlooks for AUD/JPY and AUD/USD rates in the near-term, according to the IG Client Sentiment Index.
Australian Dollar Rides Global Optimism
A tidal wave of global optimism around US elections and coronavirus vaccine development news have boosted demand for growth-linked assets and currencies, groups in which the Australian Dollar finds itself. Boosted by the fact that the Asia/Pacific region – where many of Australia’s largest trading partners are located – has weathered the coronavirus pandemic better than the Eurozone or the United States, the growth outlook for Australia in the near-term has provided a boost in an otherwise already bullish environment.
Now, the two major AUD-crosses, AUD/JPY and AUD/USD, have once again started to test key technical resistance, suggesting that their respective consolidations experienced in recent months will finally yield bullish breakouts. The RBA may not be able to stop near-term appreciation by the Australian Dollar, given recent tweaks to policy.
Reserve Bank of Australia Changes Mandate – Why It Matters
The RBA’s November policy meeting produced a 15-bps rate cut as expected, but the more significant development was the shift in focus for policymakers. RBA Governor Philip Lowe said that “Labour markets are working differently than they used to and wage and inflation dynamics have changed…given this, we have now moved to place much more weight on actual outcomes, rather than forecast outcomes, in our decision making and our forward guidance.”
In effect, this means there will be a greater focus on actual labor market outcomes (e.g. the unemployment rate) over expected price pressures. The Reserve Bank of Australia itself has conceded that the housing market and labor market remain more robust than anticipated earlier this year, suggesting that any more extraordinary easing efforts may not come via the interest rate channel.
RESERVE BANK OF AUSTRALIA INTEREST RATE EXPECTATIONS (NOVEMBER 24, 2020) (TABLE 1)
According to Australia overnight index swaps, there is between a 22 to 25% chance of a rate cut through December 2021, which appears to be nothing more than a pricing quirk due to the RBA’s extraordinary efforts to institute yield curve control. The RBA will be keeping its overnight cash rate at 0.1% or lower for at least the next two and a half years. The December RBA meeting should be a non-event that does little to interfere with a bullish technical environment for AUD/JPY and AUD/USD rates.
AUD/USD RATE TECHNICAL ANALYSIS: DAILY CHART (NOVEMBER 2019 to NOVEMBER 2020) (CHART 1)
Despite no significant progress in either direction for the better part of five months, AUD/USD rates continue to gain traction through the descending trendline from the October 2013 and January 2018 highs. On approach to range resistance near 0.7414, bullish momentum is firming up. AUD/USD rates are above the daily 5-, 8-, 13-, and 21-EMA, which is in bullish sequential order. Daily MACD is trending higher in bullish territory, and Slow Stochastics are holding in overbought territory.
A bullish breakout in AUD/USD rates could occur above 0.7414, setting up two potential measured moves. First, an extremely aggressive interpretation of recent price action would measure the recent consolidation as a bull flag in context of the move off of the March low. To this end, the 100% Fibonacci extension of the March low to September high to November low move would call for a final target of 0.8899 – a far cry from where AUD/USD rates sit today.
The second scenario, a simple doubling of the range, which at 422-pips, would suggest a target of 0.7836. From this strategist’s perspective, it may be good for traders to keep the more aggressive scenario in the back of their mind as price action unfolds over the coming weeks, if only to see if this longer-term technical potential is being realized (thus proving a good road map for what to reasonably expect in the future for AUD/USD rates).
IG Client Sentiment Index: AUD/USD RATE Forecast (November 24, 2020) (Chart 2)
AUD/USD: Retail trader data shows 32.88% of traders are net-long with the ratio of traders short to long at 2.04 to 1. The number of traders net-long is 1.10% lower than yesterday and 0.42% higher from last week, while the number of traders net-short is 8.73% higher than yesterday and 7.37% 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 (MARCH 2016 to NOVEMBER 2020) (CHART 3)
Similar to AUD/USD rates, AUD/JPY rates have been trading sideways in recent months, although AUD/JPY rates have taken the form of a descending channel rather than a sideways consolidation. Nevertheless, the interpretation is the same: a bull flag consolidation in context of the move off of the March lows. The descending channel’s resistance finds itself converging with the descending trendline from the November 2014 and January 2018 highs – a strong indication that this is indeed a critical level for AUD/JPY rates.
AUD/JPY rates have started to push through said resistance, setting up a quick return back to the November highs at 77.10. Achieving and breaking through 77.10 would instill greater confidence that AUD/JPY rates were in the beginning stages of a bullish breakout attempt, initially tracking towards the 2020 high at 78.46.
IG Client Sentiment Index: AUD/JPY Rate Forecast (November 24, 2020) (Chart 4)
AUD/JPY: Retail trader data shows 39.42% of traders are net-long with the ratio of traders short to long at 1.54 to 1. The number of traders net-long is 13.98% lower than yesterday and 18.02% higher from last week, while the number of traders net-short is 2.63% higher than yesterday and 9.09% 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.
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
