AUD/USD Weakness to Persist as Bullish RSI Formations Falter

Australian Dollar Talking Points

AUD/USD trades to a fresh monthly low (0.6827) ahead of Australia’s Employment report, and recent developments in the Relative Strength Index (RSI) instills a bearish outlook for the exchange rate as the oscillator snaps the upwards trends carried over from 2019.

AUD/USD Weakness to Persist as Bullish RSI Formations Falter

AUD/USD extends the series of lower highs and lows from earlier this week even though Australia Treasurer Josh Frydenberg tweets that the “Australian economy remains remarkably resilient,” and the correction from the 2019 low (0.6671) may continue to unravel as the ongoing wildfire is expected to curb “everything from tourism to household consumption.”

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Mr. Frydenberg warns that the “full economic impact is still uncertain” as the government struggles to contain the disaster, and fears of an economic shock may put pressure on the Reserve Bank of Australia (RBA) to implement lower interest rates as Governor Philip Lowe and Co. insist that the board has “the ability to provide further stimulus.

Nevertheless, updates to Australia’s Employment report may keep the RBA on the sidelines as the economy is anticipated to add 10.0K jobs in December, and a further improvement in the labor market may encourage the central bank to endorse a wait-and-see approach at its first meeting for 2020 as “the Australian economy appeared to have reached a gentle turning point.

Image of RBA interest rate decisions

In turn, the RBA may merely attempt to buy time on February 4, but the data may do little to influence the monetary policy outlook as “the current rate of wages growth was not consistent with inflation being sustainably within the target range.”

As a result, the RBA may continue to respond to the slowdown in global growth and insulate the economy from the shift in US trade policy as China, Australia’s largest trading partner, expands 6.0% in the fourth-quarter of 2019, the lowest reading since the series began in 1992.

With that said, Governor Lowe and Co. may retain a dovish forward guidance in 2020, andAUD/USD may face a more bearish fate over the coming months as the Federal Reserve moves way from its rate easing cycle.

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AUD/USD Rate Daily Chart

Image of AUD/USD rate daily chart

Source: Trading View

  • AUD/USD has been capped by the 200-Day SMA (0.6887) for most of 2019, but the recent break/close above the moving average signaled a potential shift in market behavior especially as the Relative Strength Index (RSI) pushed into overbought territory for the first time since 2018.
  • However, the bullish momentum may continue to abate as the RSI falls back from overbought territory, with the oscillator snapping the bullish formations from the previous year.
  • Keep in mind, the monthly opening range has been a key dynamic for AUD/USD in the fourth quarter of 2019 as the exchange rate carved a major low on October 2, with monthly high for November occurring during the first full week of the month, while the low for December happened on the first day of the month.
  • The opening range for 2020 highlights a similar dynamic as AUD/USD extends the decline from the December high (0.7032).
  • In turn, the correction from the 2019 low (0.6671) may continue to unravel as it failed to produce a test of the July high (0.7082), with AUD/USD pushing to fresh monthly lows following the string of failed attempts to close above 0.6910 (38.2% expansion).
  • The break/close below 0.6850 (78.6% expansion) region opens up the 0.6800 (61.8% expansion) handle, with the next area of interest coming in around 0.6720 (78.6% expansion) to 0.6730 (100% expansion) followed by the overlap around 0.6630 (100% expansion) to 0.6650 (61.8% expansion).

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— Written by David Song, Currency Strategist

Follow me on Twitter at @DavidJSong.

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