AUD/USD Unfazed by Ban on Australian Coal as Risk Appetite Improves

Australian Dollar Talking Points

AUD/USD pulls back from the monthly high (0.7243) as the US Dollar recovers against most of its major counterparts, but the improvement in risk appetite may keep the exchange rate afloat as the Greenback reflects an inverse relationship with investor confidence.

AUD/USD Unfazed by Ban on Australian Coal as Risk Appetite Improves

AUD/USD appears to be unfazed by headlines stating that China has banned coal imports from Australia as Trade Minister Simon Birmingham insists that “we do not have proof that this is occurring” during an interview with Sky News.

The price action following the Reserve Bank of Australia (RBA) interest rate decision suggests that the decline from the yearly high (0.7414) may have been an exhaustion in the bullish trend rather than a change in market behavior as AUD/USD clears the monthly opening range, with the Relative Strength Index (RSI) displaying a similar dynamic as it breaks out of the downward trend carried over from the previous month.

In turn, the advance from the monthly low (0.7096) may gather pace as the bearish momentum abates, but the update to Australia’s Employment report may drag on AUD/USD as the economy is expected to shed 35K jobs in September.

Image of ASX 30 Day Interbank Cash Rate Futures

Source: ASX

At the same time, the ASX 30 Day Interbank Cash Rate Futurescontinues to reflect a greater than 70% probability for a rate cut in November, and speculation for an RBA rate cut may produce headwinds for the Australian Dollar as the “Board continues to consider how additional monetary easing could support jobs as the economy opens up further.

However, it remains to be seen if the RBA will deploy more non-standard tools to insulate the economy after tweaking the Term Funding Facility (TFF) in September, and Governor Philip Lowe and Co. may stick to the same script at the next meeting on November 3 as Treasurer Josh Frydenbergplans to provide additional fiscal support through income tax cuts.

Until then, swings in investor confidence may continue to sway AUD/USD as key market trends remain in place, with the tilt in retail sentiment resurfacing in October as retail traders flip net-short the pair.

Image of IG Client Sentiment for AUD/USD rate

The IG Client Sentiment report shows 39.87% of traders are net-long AUD/USD, with the ratio of traders short to long standing at 1.51 to 1. The number of traders net-long is 15.90% higher than yesterday and 0.53% higher from last week, while the number of traders net-short is 3.52% higher than yesterday and 4.12% higher from last week.

The rise in net-long position comes as AUD/USD clears the monthly opening range, while the rise in net-short interest has spurred a greater tilt in retail positioning as 41.58% of traders were net-long the pair during the previous week.

With that said, the pullback from the yearly high (0.7414) may turn out to be an exhaustion in the bullish trend rather than a change in market behavior as the crowding behavior in AUD/USD reappears, with the Relative Strength Index (RSI) highlighting a similar dynamic as it reverses from oversold territory and breaks out a downward trend carried over from the previous month.

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AUD/USD Rate Daily Chart

Image of AUD/USD rate daily chart

Source: Trading View

  • Keep in mind, the advance from the 2020 low (0.5506) gathered pace as AUD/USD broke out of the April range, with the exchange rate clearing the January high (0.7016) in June as the Relative Strength Index (RSI) pushed into overbought territory.
  • AUD/USD managed to clear the June high (0.7064) in July even though the RSI failed to retain the upward trend from earlier this year, with the exchange rate pushing to fresh yearly highs in August and September to trade at its highest level since 2018.
  • The RSI instilled a bullish outlook for AUD/USD during the same period as it threatened the downward trend from earlier this year to push into overbought territory for the fourth time in 2020, but a textbook sell-signal emerged as the indicator quickly slipped back below 70.
  • The RSI established a downward trend in September as the indicator fell to its lowest level since April, but the bearish momentum has abated as the RSI fails to push into oversold territory to reflect the extreme readings seen in March.
  • As a result, the pullback from the yearly high (0.7414) may turn out to be an exhaustion in the bullish trend rather than a change in AUD/USD behavior as the RSI breaks out of the downward trend carried over from the previous month, with the break/close above the 0.7180 (61.8% retracement) region pushing the exchange rate towards the 0.7270 (23.6% expansion) area.
  • Next region of interest comes in around 0.7370 (38.2% expansion) to 0.7390 (38.2% expansion), which largely lines up with the 2020 high (0.7414), followed by the 0.7480 (50% expansion) area.

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— Written by David Song, Currency Strategist

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