AUD/USD Weakness to Persist on Failure to Defend Monthly Range

Australian Dollar Talking Points

AUD/USD gives back the advance following the lackluster US Non-Farm Payrolls (NFP) report as the total number of COVID-19 cases in Australia climbs above 1 million, and the reversal from the December high (0.7278) may gather pace if the exchange rate fails to defend the opening range for January.

AUD/USD Weakness to Persist on Failure to Defend Monthly Range

AUD/USD approaches the monthly low (0.7130) even as Australia Prime Minster Scott Morrison looks to avoid another lockdown as the Omicron variant is likely to put pressure on the Reserve Bank of Australia (RBA) to further support the economy.

PM Morrison argues that “Omicron is a gear change and we have to push through” while speaking in Canberra, and it remains to be seen if the RBA will relay a similar message 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.”

The uncertainty posed by the Omicron variant may keep AUD/USD within the December range as the RBA remains “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,” but the Australia Dollar may face headwinds ahead of the next interest rate decision on February 1 as Governor Philip Lowe and Co. pledge to “not increase the cash rate until actual inflation is sustainably within the 2 to 3 per cent target range.”

Until then, AUD/USD may trade within a defined range even though the Federal Reserve appears to be on track to implement higher US interest rates over the coming months, but the tilt in retail sentiment looks poised to persist as retail traders have been net-long the pair since November.

The IG Client Sentiment report shows 53.38% of traders are currently net-long AUD/USD, with the ratio of traders long to short standing at 1.14 to 1.

The number of traders net-long is 6.04% higher than yesterday and 4.19% higher from last week, while the number of traders net-short is 22.59% higher than yesterday and 20.18% higher from last week. The rise in net-long position comes as AUD/USD fails to extend the series of lower highs and lows from the previous week, while the jump in net-short position has helped to alleviate the crowding behavior as 62.75% of traders were net-long the pair in mid-December.

With that said, AUD/USD may face a further decline over the coming days if it fails to defend the opening range for January, and the exchange rate may exhibit a bearish trend in 2022 amid the diverging paths between the RBA and Federal Open Market Committee (FOMC).

AUD/USD Rate Daily Chart

Source: Trading View

• Keep in mind, AUD/USD traded to a fresh yearly low (0.6993) in December, which pushed the Relative Strength Index (RSI) into oversold territory, but a textbook buy signal emerged following the failed attempt to test the November 2020 low (0.6991) as the oscillator climbed back above 30.
• Nevertheless, the negative slopes in both the 50-Day SMA (0.7218) and the 200-Day SMA (0.2718) indicates that the broader outlook for AUD/USD remains tilted to the downside as the exchange rate appears to have reversed from the December high (0.7278).
• Need a break of the opening range for January along with a close below the Fibonacci overlap around 0.7130 (61.8% retracement) to 0.7180 (61.8% retracement) to bring the 0.7070 (61.8% expansion) to 0.7090 (78.6% retracement) region on the radar, with a break of the November 2020 low (0.6991) opening up the 0.6940 (78.6% expansion) area.
• However, AUD/USD may trade within a defined range if it continues to defend the monthly opening range, with a close above the Fibonacci overlap around 0.7130 (61.8% retracement) to 0.7180 (61.8% retracement) bringing the 0.7260 (38.2% expansion) region on the radar.

— Written by David Song, Currency Strategist

Follow me on Twitter at @DavidJSong