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Australian Dollar Rally Slows, but AUD/JPY, AUD/USD Momentum Points Higher

Australian Dollar Rally Slows, but AUD/JPY, AUD/USD Momentum Points Higher

Christopher Vecchio, CFA, Senior Strategist
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Australian Dollar Rates Overview:

  • The two major AUD-crosses are breaking higher through technical resistance that defined consolidations in recent months.
  • Growth-linked assets and currencies, like Australian Dollar, continue to benefit from improving investor confidence as coronavirus vaccine approval and deployment has begun across developed Western economies.
  • There’s a mixed if not bullish bias to the Australian Dollar in the near-term, according to the IG Client Sentiment Index.

Australian Dollar Still Looks Strong

Global risk appetite remains strong, with equity markets having pushed to fresh record highs within recent days. Growth-linked assets and currencies, like Australian Dollar,continue to benefit from improving investor confidence as coronavirus vaccine approval and deployment has begun across developed Western economies. Coupled with the fact that the Asia/Pacific region continues to handle the COVID-19 outbreak better than the Eurozone or the United States, the near-term growth outlook for Australia remains strong.

In our last update prior to the December Reserve Bank of Australia rate decision, we noted that “the RBA may not be able to stop near-term appreciation by the Australian Dollar, given recent tweaks to policy.” After a December RBA meeting where policymakers effectively admitted as much, we find that the two major AUD-crosses, AUD/JPY and AUD/USD,are breaking higher through technical resistance that defined consolidations in recent months.

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AUD/USD RATE TECHNICAL ANALYSIS: DAILY CHART (December2019 to December 2020) (CHART 1)

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Although selling transpired later in the session on the back of US equity market declines, the AUD/USD appears to be finally perching itself through sideways consolidation resistance in place for the better part of five months. Find themselves on the topside of the descending trendline from the October 2013 and January 2018 highs, AUD/USD rates have retained a bullish posture during the consolidation as the prospect of a longer-term bottom came into focus.

The steps towards firming up a longer-term bottom have continued, and with AUD/USD rates above the daily 5-, 8-, 13-, and 21-EMA, which is in bullish sequential order, bullish momentum is gathering pace. Daily MACD is trending higher in bullish territory, and Slow Stochastics are holding in overbought territory; both indicators have seen attempts to relieve exhaustion sputter.

A simple doubling of the five-month range, which at 422-pips, would suggest a final target of 0.7836 for the next AUD/USD rate rally.

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IG Client Sentiment Index: AUD/USD RATE Forecast (December 9, 2020) (Chart 2)

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AUD/USD: Retail trader data shows 29.89% of traders are net-long with the ratio of traders short to long at 2.35 to 1. The number of traders net-long is 19.42% lower than yesterday and 1.66% higher from last week, while the number of traders net-short is 5.99% higher than yesterday and 1.61% 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 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 2019 to December 2020) (CHART 3)

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The bull flag consolidation in context of the move off of the March lows may be giving way to a bullish breakout attempt in AUD/JPY. The flag resistance was converging with the descending trendline from the November 2014 and January 2018 highs, and the breakout suggests that a meaningful hurdle has been cleared for AUD/JPY rates.

In the last update it was noted that “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.” Last spotted at 77.51, AUD/JPY rates have breached the November high and remain on track to test the yearly high at 78.46.

IG Client Sentiment Index: AUD/JPY Rate Forecast (December 9, 2020) (Chart 4)

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AUD/JPY: Retail trader data shows 31.95% of traders are net-long with the ratio of traders short to long at 2.13 to 1. The number of traders net-long is 13.78% lower than yesterday and 21.76% lower from last week, while the number of traders net-short is 1.10% lower than yesterday and 20.00% 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.

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

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

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