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AUD/USD Selloff Pushes RSI Into Oversold Territory

AUD/USD Selloff Pushes RSI Into Oversold Territory

David Song, Strategist

Australian Dollar Talking Points

AUD/USD clears the June 2020 low (0.6648) as it trades to a fresh yearly low (0.6438), and the exchange rate may attempt to test the May 2020 low (0.6373) as the Relative Strength Index (RSI) pushes into oversold territory.

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AUD/USD Selloff Pushes RSI Into Oversold Territory

AUD/USD extends the series of lower highs and lows from last week to largely mirror the weakness across commodity bloc currencies, and the move below 30 in the RSI is likely to be accompanied by a further decline in the exchange rate like the price action seen earlier this year.

As a result, the update to Australia’s Retail Sales report may do little to influence AUD/USD as household spending is expected to increase 0.4% in August after expanding 1.3% the month prior, and a slowdown in private sector consumption may sway the Reserve Bank of Australia (RBA) as the central bank warns that “an important source of uncertainty continued to be the behaviour of household spending.”

In turn, the RBA may adjust its approach in normalizing monetary policy as the central bank plans to keep the “economy on an even keel,” and it remains to be seen if Governor Philip Lowe and Co. will deliver a smaller rate hike at the next meeting on October 4 as “members saw the case for a slower pace of increase in interest rates as becoming stronger as the level of the cash rate rises.”

Until then, AUD/USD may continue to depreciate as long as the RSI holds below 30, and a further decline in the exchange rate may fuel the tilt in retail sentiment like the behavior seen earlier this year.

The IG Client Sentiment report shows 78.27% of traders are currently net-long AUD/USD, with the ratio of traders long to short standing at 3.60 to 1.

The number of traders net-long is 3.52% higher than yesterday and 7.14% lower from last week, while the number of traders net-short is 19.28% higher than yesterday and 9.22% lower from last week. The decline in net-long interest has done little to alleviate the crowding behavior as 73.85% of traders were net-long AUD/USD last week, while the drop in net-short position comes as the exchange rate trades to a fresh yearly low (0.6438).

With that said, the oversold reading in the RSI is likely to be accompanied by a further decline in AUD/USD like the price action from earlier this year, and the exchange rate may attempt to test the May 2020 low (0.6373) as it extends the series of lower highs and lows from last week.

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AUD/USD Rate Daily Chart

Source: Trading View

  • AUD/USD clears the June 2020 low (0.6648) as it tumbles to a fresh yearly low (0.6438), with the weakness in the exchange rate pushing the Relative Strength Index (RSI) into oversold territory.
  • AUD/USD may continue to carve a series of lower highs and lows as long as the RSI holds below 30, with the close below the Fibonacci overlap around 0.6460 (61.8% retracement) to 0.6530 (61.8% expansion) raising the scope for a test of the 0.6370 (78.6% expansion) area, which lines up with the May 2020 low (0.6373).
  • Next area of interest comes in around the 0.6290 (161.8% expansion) region, but lack of momentum to close below the overlap around 0.6460 (61.8% retracement) to 0.6520 (38.2% expansion) may curb the bearish price action in AUD/USD, with a move above 30 in the RSI likely to generate a near-term rebound in the exchange rate.
  • Failure to extend the series of lower highs and lows may push AUD/USD back towards 0.6650 (50% expansion), with the next area of interest coming in around 0.6760 (50% retracement) to 0.6770 (100% expansion).

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--- 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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