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AUD/USD Rate Vulnerable to Contraction in Australia GDP

AUD/USD Rate Vulnerable to Contraction in Australia GDP

David Song, Strategist

Australian Dollar Talking Points

AUD/USD trades to a fresh yearly low (0.7062) after failing to defend the August low (0.7106), and fresh developments coming out of Australia may keep the exchange rate under pressure as the Gross Domestic Product (GDP) is anticipated to show a contraction in the growth rate.

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AUD/USD Rate Vulnerable to Contraction in Australia GDP

AUD/USD extends the decline from earlier this month as Federal Reserve Chairman Jerome Powellstrikes a hawkish tone in front of US lawmakers, and the Australian Dollar may continue to depreciate against its US counterpart as the Reserve Bank of Australia (RBA) remains in no rush to implement higher interest rates.

Image of DailyFX Economic Calendar for Australia

The update to Australia’s GDP report may keep the RBA on the sidelines as the economy is expected to contract 2.7% in the third quarter of 2021, with the growth rate slowing to 3.0% from 9.6% per annum during the three-months through June.

As a result, the RBA appears to be on track to retain the current policy at its last interest rate decision for this year as “the central scenario for the economy continued to be consistent with the cash rate remaining at its current level until 2024,” and the Australian Dollar may face headwinds ahead of the next meeting on December 7 as Governor Philip Lowe and Co. remains “committed to maintaining highly supportive monetary conditions to achieve a return to full employment in Australia and inflation consistent with the target.

In turn, AUD/USD may continue to trade to fresh yearly lows over the remainder of 2021 as the Federal Reserve carries out its exit strategy, but a further decline in the exchange rate may fuel the tilt in retail sentiment like the behavior seen earlier this year.

Image of IG Client Sentiment for AUD/USD rate

The IG Client Sentiment report shows 72.22% of traders are currently net-long AUD/USD, with the ratio of traders long to short standing at 2.60 to 1.

The number of traders net-long is 4.07% lower than yesterday and 2.52% higher from last week, while the number of traders net-short is 1.26% lower than yesterday and 22.36% lower from last week. The rise in net-long interest has fueled the crowding behavior as 62.16% of traders were net-long AUD/USD last week, while the decline in net-short position comes as the exchange rate trades to a fresh yearly low (0.7062).

With that said, the update to Australia’s GDP report may keep AUD/USD under pressure as the growth rate is expected to contract in the third quarter, and the weakness in the exchange rate may persist as long as the Relative Strength Index (RSI) sits in oversold territory.

AUD/USD Rate Daily Chart

Image of AUD/USD rate daily chart

Source: Trading View

  • Keep in mind, AUD/USD traded to fresh yearly lows in the second-half of 2021 as the Relative Strength Index (RSI) slipped below 30 for the first time since March 2020, with a similar development taking shape in November as the oscillator sits in oversold territory.
  • Failure to defend the August low (0.7106) may continue to push AUD/USD to fresh yearly lows as long as the RSI holds below 30, but need a close below the Fibonacci overlap around 0.7060 (61.8% expansion) to 0.7090 (78.6% retracement) to bring the 0.6950 (78.6% expansion) region on the radar.
  • However, lack of momentum to close below the overlap around 0.7060 (61.8% expansion) to 0.7090 (78.6% retracement) may pull the RSI out of oversold territory, and a move above 30 in the oscillator may push AUD/USD back towards the 0.7180 (61.8% retracement) to 0.7210 (78.6% retracement) region, with the next area of interest coming in around 0.7290 (23.6% expansion).

--- Written by David Song, Currency Strategist

Follow me on Twitter at @DavidJSong

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

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