Australian Dollar Outlook:
- Both AUD/JPY and AUD/USD rates have started to show early signs of basing, suggesting that a turn higher may soon emerge.
- RBA rate hike odds have begun to creep higher, providing fundamental support for a move higher by the Australian Dollar.
- However, per the IG Client Sentiment Index, both AUD/JPY and AUD/USD rates still have a bearish bias.
Tides Beginning to Turn
Despite the volatility in risk assets over the past week, the AUD-crosses are holding up in a respectable manner. To wit, AUD/JPY rates are on the cusp of posting their second highest close through all of December. Now that safe havens are taking a step back and US equity markets are rallying – climbing the latest brick in the wall of worry, the COVID-19 omicron variant – the higher yielding, high beta currencies like the Australian Dollar may prove more appealing.
For both AUD/JPY and AUD/USD rates, there are early signs that a technical turn higher may soon gather pace. AUD/JPY rates retested their downtrend from the November and December swing highs and rallied, while AUD/USD rates have been flagging after breaking out above their October and November downtrend. And now that the Australian Dollar has a seemingly more hawkish Reserve Bank of Australia at its back, the fundamental side of the equation is no longer a burden like it was just a few weeks ago.
AUD/USD RATE TECHNICAL ANALYSIS: DAILY CHART (February 2020 to December 2021) (CHART 1)
AUD/USD rates are still in the throes of two longer-term bearish technical developments: the descending parallel channel in place since the end of June; and the breakdown below the rising trendline from the March 2020 and August 2021 lows.
But the near-term technical outlook has improved, insofar as the downtrend from the October and November swing highs has been broken, and price action has yielded a flag after the nascent move higher. Furthermore, AUD/USD rates are basing above a cluster of Fibonacci levels: the 61.8% retracement of the 2018 high/2020 low range at 0.7121; and the 38.2% retracement of the 2020 low/2021 high range at 0.7052.
Momentum indicators are indecisive, however. AUD/USD rates are intertwined among their daily EMA envelope: above the 5-, 8-, and 13-EMAs, but still below the daily 21-EMA. Daily MACD continues to rise but remains below its signal line, while daily Slow Stochastics are shifting sideways, above their median line but not yet in overbought territory. A move above the December closing high at 0.7184 would offer a confirmation signal that the next leg higher has begun.
IG Client Sentiment Index: AUD/USD RATE Forecast (December 21, 2021) (Chart 2)
AUD/USD: Retail trader data shows 68.59% of traders are net-long with the ratio of traders long to short at 2.18 to 1. The number of traders net-long is 2.84% higher than yesterday and 3.60% higher from last week, while the number of traders net-short is 1.42% higher than yesterday and 24.34% lower from last week.
We typically take a contrarian view to crowd sentiment, and the fact traders are net-long suggests AUD/USD prices may continue to fall.
Traders are further net-long than yesterday and last week, and the combination of current sentiment and recent changes gives us a stronger AUD/USD-bearish contrarian trading bias.
AUD/JPY RATE TECHNICAL ANALYSIS: DAILY CHART (December 2020 to December 2021) (CHART 3)
AUD/JPY rates continue to trade in a broad sideways range in place for the past 12-months, but the breakout above the descending trendline from the November and early-December swing highs now sees the pair turning higher in the top half of its year-long range. Today’s close marks the second highest closing level of the month for the pair, marking a climb above its daily 21-EMA envelope (although the daily EMA envelope is not yet in bullish sequential order). A further rally to the ascending trendline from the March 2020 and August 2021 lows appears in order; clearing the December high at 82.44 would mark a meaningful bullish technical reversal, opening the door for a return back to 86.00 in early-2022.
IG Client Sentiment Index: AUD/JPY Rate Forecast (December 21, 2021) (Chart 4)
AUD/JPY: Retail trader data shows 54.57% of traders are net-long with the ratio of traders long to short at 1.20 to 1. The number of traders net-long is 2.31% higher than yesterday and 8.33% higher from last week, while the number of traders net-short is 8.00% lower than yesterday and 31.34% lower from last week.
We typically take a contrarian view to crowd sentiment, and the fact traders are net-long suggests AUD/JPY prices may continue to fall.
Traders are further net-long than yesterday and last week, and the combination of current sentiment and recent changes gives us a stronger AUD/JPY-bearish contrarian trading bias.
Read more: Central Bank Watch: BOC, RBA, & RBNZ Interest Rate Expectations Update
--- Written by Christopher Vecchio, CFA, Senior Strategist
