Australian Dollar Outlook:
- AUD/JPY rates continue to consolidate in a potential bull flag, which has been in place since the middle of June.
- On the other hand, AUD/USD rates lost their recent uptrend, suggesting a retest of the August low may not be far away.
- According to the IG Client Sentiment Index, AUD/JPY rates have a bullish bias while AUD/USD rates have a bearish bias.
Telling Different Stories
There doesn’t appear to be a consistent theme developing across the AUD-crosses. On one hand, a glance at AUD/JPY rates suggests that the Australian Dollar is in the midst of a consolidation that may ultimately yield a push to new highs. On the other hand, AUD/USD rates are exhibiting signs of sudden weakness, down nearly -3% from their monthly high set last week.
Given what’s transpiring elsewhere – in AUD/NZD, EUR/AUD, and GBP/AUD rates – it appears that AUD/JPY rates’ relative strength is misleading. After all, Japanese Yen weakness has been pronounced in recent days, thanks in part to rising sovereign bond yields and resilient global equity markets. Beyond the Yen, base metal prices (copper, iron ore, nickel) have softened amid growth concerns out of China, Australia’s largest trading partner.
AUD/USD rates’ downside – and the weakness seen by the Aussie elsewhere – suggests that AUD/JPY rates’ recent consolidation is likely to continue.
AUD/USD RATE TECHNICAL ANALYSIS: DAILY CHART (August 2021 to August 2022) (CHART 1)
The rally out of the broad downtrend in place since the February 2021 high may have ended, as AUD/USD rates are in the process of breaking the uptrend from the July and early-August swing lows. Momentum is turning bearish, with the pair below its daily 5-, 8-, 13-, and 21-EMA envelope, which is in neither bearish nor bullish sequential order. Daily MACD has issued a bearish crossover albeit above its signal line, while daily Slow Stochastics have plunged out of overbought territory in recent days. A move back to the August low at 0.6869 is in focus.
IG Client Sentiment Index: AUD/USD RATE Forecast (August 17, 2022) (Chart 2)
AUD/USD: Retail trader data shows 65.09% of traders are net-long with the ratio of traders long to short at 1.86 to 1. The number of traders net-long is 9.39% higher than yesterday and 38.82% higher from last week, while the number of traders net-short is 20.96% lower than yesterday and 32.37% 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 (August 2021 to August 2022) (CHART 3)
AUD/JPY rates are in a familiar area, continuing to trade around the 61.8% Fibonacci extension of the March 2020 low/May 2021 high/August 2021 range at 92.92 and the 76.4% Fibonacci retracement of the 2013 high/2020 low range at 94.68. More broadly, the pair remains within the bull flag that’s been carved out since mid-June.
Momentum is lacking. The pair is pinned at its daily 5-, 8-, 13-, and 21-EMA envelope, which is in neither bearish nor bullish sequential order. Daily MACD is above its signal line but flat, while daily Slow Stochastics are turning lower after failing to reach overbought territory. While the bull flag suggests a continuation move to fresh yearly highs, the contextual performance of other AUD-crosses suggests that more consolidation is the likely path forward in the near-term.
IG Client Sentiment Index: AUD/JPY Rate Forecast (August 17, 2022) (Chart 4)
AUD/JPY: Retail trader data shows 24.35% of traders are net-long with the ratio of traders short to long at 3.11 to 1. The number of traders net-long is 5.88% lower than yesterday and 17.04% lower from last week, while the number of traders net-short is 13.73% higher than yesterday and 11.90% 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.
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--- Written by Christopher Vecchio, CFA, Senior Strategist
