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Australian Dollar Forecast: Bull Run Resumes - Setups for AUD/JPY, AUD/USD

Australian Dollar Forecast: Bull Run Resumes - Setups for AUD/JPY, AUD/USD

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

  • The two major AUD-crosses have been trading in bull flags in recent weeks, but the consolidations may soon be finished.
  • 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 mixed if not bullish bias to the Australian Dollar in the near-term, according to the IG Client Sentiment Index.

Australian Dollar Has Been Held Back

While the Australian Dollar came into 2021 with the wind at its back, the initial yearly highs were quickly found in pairs like AUD/JPY and AUD/USD by the end of the first week of the year. Most of January and early-February have been marked by further consolidation in what appears to be bull flags in both pairs. With risk appetite on the rise and safe haven assets faltering, AUD/JPY rates have popped out of their bull flag to commence a bullish breakout attempt. AUD/USD rates may not be far behind, now that the US Dollar is fading.

AUD/USD RATE TECHNICAL ANALYSIS: DAILY CHART (February 2020 to February 2021) (CHART 1)

Australian Dollar Forecast: Bull Run Resumes - Setups for AUD/JPY, AUD/USD

AUD/USD’s rally paused in early-January upon reaching the 38.2% Fibonacci extension of the move measured from the March 2020 low to September 2020 high, drawn to the October 2020 low. This wasn’t a surprise, as it was noted at the time this the initial rally into this area just might “offer a profit taking point for traders already long.” Indeed, a bull flag formed around this level. Overtaking 0.7720 would be a meaningful accomplishment, a sign that the bullish breakout attempt is ready to commence.

Bullish momentum is once again proving strong. AUD/USD rates are above their daily 5-, 8-, 13-, and 21-EMA envelope, which is in bullish sequential order. Daily MACD is trending higher above its signal line –notably avoiding a crossover into bearish territory – while daily Slow Stochastics are racing higher through their median line. The path of least resistance appears to be higher for AUD/USD rates.

IG Client Sentiment Index: AUD/USD RATE Forecast (February 9, 2021) (Chart 2)

Australian Dollar Forecast: Bull Run Resumes - Setups for AUD/JPY, AUD/USD

AUD/USD: Retail trader data shows 40.67% of traders are net-long with the ratio of traders short to long at 1.46 to 1. The number of traders net-long is 7.12% higher than yesterday and 10.46% lower from last week, while the number of traders net-short is 12.36% higher than yesterday and 27.57% 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 (February 2020 to February 2021) (CHART 3)

Australian Dollar Forecast: Bull Run Resumes - Setups for AUD/JPY, AUD/USD

AUD/JPY rates have proven more bullish than their AUD/USD counterpart, having already commenced their bullish breakout attempt from the flag consolidation in place for most of January and early-February. Having set fresh yearly highs, and with the bull flag consolidation forming above the 2020 highs, there is decent reason to believe that the several weeks-long pause in gains was merely an episode of profit taking and repositioning. The pair is still above the daily 5-, 8-, 13-, and 21-EMA envelope, daily MACD has just issued a bullish crossover above its signal line, and daily Slow Stochastics have reached overbought territory. More gains may be yet ahead.

IG Client Sentiment Index: AUD/JPY Rate Forecast (February 9, 2021) (Chart 4)

Australian Dollar Forecast: Bull Run Resumes - Setups for AUD/JPY, AUD/USD

AUD/JPY: Retail trader data shows 29.09% of traders are net-long with the ratio of traders short to long at 2.44 to 1. The number of traders net-long is 5.70% higher than yesterday and 5.03% higher from last week, while the number of traders net-short is 3.30% higher than yesterday and 45.36% 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 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/JPY 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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