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Australian Dollar Forecast: Rally Looks Strong Heading into 2021 - Setups for AUD/JPY, AUD/USD

Australian Dollar Forecast: Rally Looks Strong Heading into 2021 - Setups for AUD/JPY, AUD/USD

Christopher Vecchio, CFA, Senior Strategist

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Australian Dollar Forecast: Rally Looks Strong Heading into 2021 - Setups for AUD/JPY, AUD/USD

In an environment defined by globally low interest rates and increased fiscal support (akin to the 2009-2011 period), growth-linked assets have been gaining favor, the Australian Dollar included.

Australian Dollar Forecast: Rally Looks Strong Heading into 2021 - Setups for AUD/JPY, AUD/USD
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Australian Dollar Forecast Overview:

  • In an environment defined by globally low interest rates and increased fiscal support (akin to the 2009-2011 period), growth-linked assets have been gaining favor, the Australian Dollar included.
  • With fresh yearly highs emerging in both AUD/JPY and AUD/USD rates on the second-to-last trading day of the year, it’s difficult to suggest anything other than a bullish outlook for the Aussie headed into 2021.
  • There’s a bullish bias to the Australian Dollar in the near-term, according to theIG Client Sentiment Index.

Australian Dollar Peaking into New Year

The near-term outlook for the Australian Dollar remains strong. With Southeast Asia managing the coronavirus pandemic better than any other region in the world, currencies linked to this normally high-growth area have fared well during the second half of 2020. In an environment defined by globally low interest rates and increased fiscal support (akin to the 2009-2011 period), growth-linked assets have been gaining favor, the Australian Dollar included.

Our approach to the Australian Dollar has not changed through December, which started with the assertion “the RBA may not be able to stop near-term appreciation by the Australian Dollar, given recent tweaks to policy.” With fresh yearly highs emerging in both AUD/JPY and AUD/USD rates on the second-to-last trading day of the year, it’s difficult to suggest anything other than a bullish outlook for the Aussie headed into 2021.

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

Australian Dollar Forecast: Rally Looks Strong Heading into 2021 - Setups for AUD/JPY, AUD/USD

In early-December it was noted that “the AUD/USD appears to be finally perching itself through sideways consolidation resistance in place for the better part of five months…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.” AUD/USD rates are well on their way, touching a fresh yearly high of 0.7686 at the time this report was written.

The next near-term target for AUD/USD’s rally comes in the form of the 38.2% Fibonacci extension of the move measured from the March low to September high, back to the October low. Achieving 0.7720 would be a meaningful accomplishment, and perhaps offer a profit taking point for traders already long.

Otherwise, with bullish momentum proving strong, traders may need to wait for a retest of the EMA envelope before entering with fresh positions. The daily 5-, 8-, 13-, and 21-EMA envelope has proved support every session since November 3; the daily 21-EMA has not been closed below since that date. For now, with daily MACD trending higher in bullish territory, and daily Slow Stochastics are holding in overbought territory, the path of least resistance remains higher for AUD/USD rates.

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IG Client Sentiment Index: AUD/USD RATE Forecast (December 30, 2020) (Chart 2)

Australian Dollar Forecast: Rally Looks Strong Heading into 2021 - Setups for AUD/JPY, AUD/USD

AUD/USD: Retail trader data shows 31.27% of traders are net-long with the ratio of traders short to long at 2.20 to 1. The number of traders net-long is 3.14% lower than yesterday and 6.59% lower from last week, while the number of traders net-short is 7.23% higher than yesterday and 14.81% 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.

Traders are further net-short than yesterday and last week, and the combination of current sentiment and recent changes gives us a stronger AUD/USD-bullish contrarian trading bias.

AUD/JPY RATE TECHNICAL ANALYSIS: DAILY CHART (December 2019 to December 2020) (CHART 3)

Australian Dollar Forecast: Rally Looks Strong Heading into 2021 - Setups for AUD/JPY, AUD/USD

In the prior AUD/JPY rate forecast it was noted that “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.” Fresh highs were touched today, with AUD/JPY rates reaching 0.7940.

AUD/JPY rates are still in process of the bullish breakout of the more near-term bull flag, carved out in the last three weeks of December. Accordingly, with the pair holding above the daily 5-, 8-, 13-, and 21-EMA envelope, daily MACD trending higher in bullish territory, and daily Slow Stochastics holding in overbought territory, more upside seems likely for AUD/JPY.

IG Client Sentiment Index: AUD/JPY Rate Forecast (December 30, 2020) (Chart 4)

Australian Dollar Forecast: Rally Looks Strong Heading into 2021 - Setups for AUD/JPY, AUD/USD

AUD/JPY: Retail trader data shows 30.30% of traders are net-long with the ratio of traders short to long at 2.30 to 1. The number of traders net-long is 5.26% higher than yesterday and 1.45% higher from last week, while the number of traders net-short is 5.85% lower than yesterday and 0.62% 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.

Yet traders are less net-short than yesterday and compared with last week. Recent changes in sentiment warn that the current AUD/JPY price trend may soon reverse lower despite the fact traders remain net-short.

--- 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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