AUD/USD Outlook Hinges on RBA Rate Decision

Australian Dollar Talking Points

AUD/USD snaps the series of lower highs and lows from last week as it bounces back from a fresh yearly low (0.6968), and the Reserve Bank of Australia (RBA) interest rate decision may fuel the recent rebound in the exchange rate if the central bank adjusts the forward guidance for monetary policy.

Australian Dollar Forecast: AUD/USD Outlook Hinges on RBA Rate Decision

AUD/USD halts a three-day selloff, with the decline following the Federal Reserve rate decision failing to push the Relative Strength Index (RSI) into oversold territory, and fresh remarks from the RBA may shore up the Australian Dollar as the central bank is currently on track to “purchase government securities at the rate of $4 billion a week until at least mid February 2022.”

Plans to cease the quantitative easing (QE) program may generate a larger recovery in AUD/USD as the “economy is expected to return to its pre-Delta path in the first half of 2022,” and the RBA may start to discuss an exit strategy in response to the larger-than-expected uptick in Australia’s Consumer Price Index (CPI).

However, the RBA may extend its purchases of government securities as “the Board is committed to maintaining highly supportive monetary conditions to achieve its objectives of a return to full employment in Australia and inflation consistent with the target,” and more of the same from Governor Philip Lowe and Co. may undermine the recent rebound in AUD/USD as the central bank pledges to “not increase the cash rate until actual inflation is sustainably within the 2 to 3 per cent target range.”

In turn, AUD/USD may exhibit a bearish trend in 2022 amid the diverging paths between the RBA and Federal Open Market Committee (FOMC), but a further decline in the exchange rate may fuel the recent flip in retail sentiment like the behavior seen during the previous year.

The IG Client Sentiment report shows 70.83% of traders are currently net-long AUD/USD, with the ratio of traders long to short standing at 2.43 to 1.

The number of traders net-long is 0.69% higher than yesterday and 12.22% higher from last week, while the number of traders net-short is 35.65% higher than yesterday and 17.80% lower from last week. The rise in net-long position comes as AUD/USD snaps the series of lower highs and lows from last week, while the decline in net-short interest has done little to alleviate the crowding behavior as 59.47% of traders were net-long the pair last week.

With that said, recent developments raise the scope for a larger recovery in AUD/USD as there appears to be a divergence between price and the RSI, and the RBA rate decision may generate a bullish reaction in the Australian Dollar if the central bank adjusts the forward guidance for monetary policy.

AUD/USD Rate Daily Chart

Source: Trading View

• AUD/USD cleared the November 2020 low (0.6991) as it pushed to a fresh monthly low (0.6968), but the Relative Strength Index (RSI) has diverged with price, with the oscillator reversing course ahead of oversold territory.
• AUD/USD has snapped the series of lower highs and lows from last week amid the lack of momentum to test the 0.6940 (78.6% expansion) region, with a move above the 0.7070 (61.8% expansion) to 0.7090 (78.6% retracement) area bringing the Fibonacci overlap around 0.7130 (61.8% retracement) to 0.7180 (61.8% retracement) back on the radar.
• However, the recent rebound in AUD/USD may turn out to be a correction in the broader trend as the 50-Day SMA (0.7167) and 200-Day SMA (0.7390) reflect a negative slope, and failure to push back above the 0.7070 (61.8% expansion) to 0.7090 (78.6% retracement) area may spur another run at the 0.6940 (78.6% expansion) region, with the next area of interest coming in around 0.6820 (23.6% retracement) to 0.6770 (100% expansion).

— Written by David Song, Currency Strategist

Follow me on Twitter at @DavidJSong