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AUD/USD Outlook Mired Ahead of RBA as RSI Divergence Takes Shape

Australian Dollar Talking Points

AUD/USD trades near the 2020 high (0.7227) ahead of the Reserve Bank of Australia (RBA) interest rate decision, and more of the same from the central bank may keep the exchange rate afloat as the crowding behavior in the US Dollar persists.

AUD/USD Outlook Mired Ahead of RBA as RSI Divergence Takes Shape

AUD/USD may show a limited reaction to the RBA as the central bank appears to be on track to keep the official cash rate (OCR) at the record low of 0.25%, and the central bank may stick to the same script as Treasurer Josh Frydenberg extends fiscal stimulus programs like the Jobkeeper Payment for six-months.

Image of DailyFX Economic Calendar for Australia

In turn, the RBA may retain the current policy throughout the remainder of the year as officials pledge to “not increase the cash rate target until progress is made towards full employment,” but it remains to be seen if the central bank will alter the forward guidance over the coming months as Governor Philip Lowe warns that “there are limitations to what more can be achieved through monetary policy.”

In a recent speech, Governor Lowe insists that “there is an important ongoing role for fiscal policy and use of the government’s balance sheet” to combat the economic shock from COVID-19, and it seems as though the RBA will rely on fiscal authorities to “build the bridge to the recovery” as the central bank continues to rule out a negative interest rate policy (NIRP) for Australia.

Image of RBA interest rate decisions

Source: RBA

As a result, it seems as though the RBA will stay on the sidelines as “the Bank had not purchased government bonds for some time, and more of the same from Governor Lowe and Co. may keep AUD/USD afloat as the IG Client Sentiment report continues to reflect crowding behavior in the US Dollar.

Image of IG Client Sentiment for AUD/USD rate

Retail traders have been net-short AUD/USD since April, with the latest update showing 39.88% of traders net-long the pair as the ratio of traders short to long stands at 1.51 to 1. The number of traders net-long is 9.01% lower than yesterday and 3.46% higher from last week, while the number of traders net-short is 13.94% lower than yesterday and 18.09% lower from last week.

The recent decline in net-long position could be indicative of profit-taking behavior ahead of the RBA meeting, while the ongoing decline in net-short interest suggests stop-loss orders are being triggered as AUD/USD trades near the 2020 high (0.7227).

With that said, current market conditions may keep AUD/USD afloat as the crowding behavior in the US Dollar persists, but the Relative Strength Index (RSI) now appears to be deviating with price as the oscillator struggles to hold in overbought territory and threatens the upward trend established in July.

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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 yearly 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) even though the RSI failed to retain the upward trend from earlier this year, with the oscillator pushing into overbought territory for the fourth time in late-July.
  • The RSI established a bullish trend during the previous month as AUD/USD traded to fresh yearly highs, but the indicator now appears to be deviating with price as it slips below 70 and flashes a textbook sell-signal, with the oscillator sitting on trendline support.
  • It remains to be seen if the RSI will bounce along trendline support as AUD/USD trades near the 2020 high (0.7227), but the break/close above the 0.7180 (61.8% retracement) region brings the 2019 high (0.7295) on the radar ahead of the RBA rate decision, with the next area of interest coming in around 0.7370 (38.2% expansion).
  • However, lack of momentum to hold above the Fibonacci overlap around 0.7090 (78.6% retracement) to 0.7140 (23.6% retracement) may push AUD/USD towards the 0.6970 (23.6% expansion) to 0.6980 (23.6% expansion) region as the RSI appears to be diverging with price, with the next area of interest coming in around 0.6910 (38.2% expansion).
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— Written by David Song, Currency Strategist

Follow me on Twitter at @DavidJSong