AUD/USD Pushes Above April 2018 High as RSI Sits in Overbought Zone

Australian Dollar Talking Points

AUD/USD extends the advance from earlier this week as the US Dollar deprecates on the back of improving risk appetite, and the Relative Strength Index (RSI) indicates a further appreciation in the exchange rate as the oscillator holds in overbought territory.

AUD/USD Pushes Above April 2018 High as RSI Sits in Overbought Zone

AUD/USD clears the April 2018 high (0.7813) as it extends the series of higher highs and lows from the start of the week, and the key market trends may keep the exchange rate afloat as the US Dollar still shows an inverse relationship with investor confidence.

In turn, AUD/USD may continue to exhibit a bullish behavior as the Federal Reserve’s balance sheet sits near the record high, and the exchange rate may approach the March 2018 high (0.7916) ahead of the next Reserve Bank of Australia (RBA) meeting on February 1 as Governor Philip Lowe and Co. acknowledge that “the improvement in risk sentiment has also been associated with a depreciation of the US dollar and an appreciation of the Australian dollar.”

Looking ahead, it seems as though the RBA will stick to the sidelines after announcing plans to purchase “$100 billion of government bonds of maturities of around 5 to 10 years over the next six months” in November, and the central bank may rely on its current tools to achieve its policy targets as the board pledges to “keep the size of the bond purchase program under review, particularly in light of the evolving outlook for jobs and inflation.

Source: ASX

However, the ASX 30 Day Interbank Cash Rate Futures February 2021 contract shows “a 65% expectation of an interest rate decrease to 0.00% at the next RBA Board meeting,” and it remains to be seen if Governor Lowe and Co. will deploy more unconventional measures in 2021 as “the Board is prepared to do more if necessary.

Until then, swings in risk sentiment may continue to sway AUD/USD, and the tilt in retail sentiment also looks poised to persist as retail traders have been net-short the pair since November.

Image of IG Client Sentiment for AUD/USD rate

The IG Client Sentiment report shows 37.72% of traders are net-long AUD/USD, with the ratio of traders short to long standing at 1.65 to 1. The number of traders net-long is 4.72% higher than yesterday and 15.64% higher from last week, while the number of traders net-short is 3.51% lower than yesterday and 6.42% lower from last week.

The rise in net-long position comes as AUD/USD clears the April 2018 high (0.7813), while the decline in net-short interest has helped to alleviate the crowding behavior as only 30.73% of traders were net-long the pair in mid-December.

With that said, key market trends may keep AUD/USD afloat as the US Dollar still shows an inverse relationship with investor confidence, and the exchange rate may approach the March 2018 high (0.7916) as long as the Relative Strength Index (RSI)holds in overbought territory.

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AUD/USD Rate Daily Chart

Image of AUD/USD rate daily chart

Source: Trading View

  • Keep in mind, the AUD/USD correction from the September high (0.7414) proved to be an exhaustion in the bullish trend rather than a change in behavior as the exchange rate cleared the October high (0.7243) in November, with the pair trading to fresh yearly highs throughout December.
  • At the same time, developments in the Relative Strength Index (RSI)showed the bullish momentum gathering pace as the indicator pushed into overbought territory for the first time since September, with the break above 70 accompanied by a further appreciation in AUD/USD like the behavior seen earlier this year.
  • The break/close above the Fibonacci overlap around 0.7720 (78.6% expansion) to 0.7740 (61.8% expansion) brings the 0.7890 (100% expansion) region on the radar followed by the March 2018 high (0.7916), with the next area of interest coming in around 0.7930 (50% retracement) to 0.7950 (50% expansion).

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— Written by David Song, Currency Strategist

Follow me on Twitter at @DavidJSong

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