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AUD/USD to Stage Larger Rebound as RSI Reverses from Oversold Zone

Australian Dollar Talking Points

AUD/USD trades in a narrow range as it snaps the series of lower highs and lows from the previous week, and the exchange rate may stage a larger rebound as the Relative Strength Index (RSI) appears to be reversing from oversold territory.

AUD/USD to Stage Larger Rebound as RSI Reverses from Oversold Zone

AUD/USD cleared the August low (0.7076)amid growing speculation for a Reserve Bank of Australia (RBA) rate cut, but the bearish momentum seems to be abating as the RSI fails to push into oversold territory to reflect the extreme readings seen in March.

In turn, the rebound from the monthly low (0.7006) may gather pace as AUD/USD remains influenced by the inverse relationship between the US Dollar and investor confidence, and a further recovery in global equity prices may fuel a further appreciation in the exchange rate as the Federal Reserve’s balance sheetwidens for the second week to reach its highest level since June.

However, the Australian Dollar may face headwinds ahead of the next RBA meeting as Deputy Governor Guy Debellewarns that “under the central scenario, it would be more than three years before sufficient progress was being made towards full employment to be confident that inflation will be sustainably within the target band.”

Image of ASX 30 Day interbank cash rate futures

Source: ASX

In turn, the ASX 30 Day Interbank Cash Rate Futures reflect a greater than 60% probability for a rate cut on October 6, but it remains to be seen if the RBA will push the official cash rate (OCR) to a fresh record low as Treasurer Josh Frydenberg is scheduled to deliver the federal budget update on the same day.

As a result, the RBA may stick to the sidelines after tweaking the Term Funding Facility (TFF) in September, and more of the same from Governor Philip Lowe and Co. may prop up AUD/USD as the central bank appears to be in no rush to deploy more non-standard measures.

Until then, swings in risk appetite may continue to influence AUD/USD, but the recent shift in retail positioning warns of a potential change in market behavior as traders turn net-long for the first time since April.

Image of IG Client Sentiment for AUD/USD rate

The IG Client Sentiment report shows 55.65% of traders are now net-long AUD/USD, with the ratio of traders long to short at 1.25 to 1. The number of traders net-long is 16.34% higher than yesterday and 16.23% higher from last week, while the number of traders net-short is 10.34% higher than yesterday and 8.40% lower from last week.

The decline in net-short position could be indicative of profit-taking behavior as AUD/USD rebounds from the monthly low (0.7006), while the rise in net-long position indicates a potential change in trend as the exchange rate pushes below the 50-Day SMA (0.7202) for the first time since April.

With that said, AUD/USD may stage a larger rebound as the bearish price sequence unravels, with the RSI reversing from oversold territory, but the rebound in the momentum indicator may end up being short-lived as the oscillator establishes a downward trend in September.

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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 slipped to its lowest level since April, but the bearish momentum seems to be abating as the RSI fails to push into oversold territory to reflect the extreme readings seen in March.
  • Will keep a close eye on the RSI as it approaches trendline resistance after briefly slipping below 30, with a break of the downward trend to offer a bullish signal even though AUD/USD fails to retain the upward trend from June.
  • Lack of momentum to test the 0.6970 (23.6% expansion) region appears to be pushing AUD/USD back towards the Fibonacci overlap around 0.7090 (78.6% retracement) to 0.7140 (23.6% retracement), with the next area of interest coming in around 0.7180 (61.8% retracement).
  • Need a break/close above 0.7270 (23.6% expansion) to bring the 2020 high (0.7414) back on the radar, which largely lines up with the overlap around 0.7370 (38.2% expansion) to 0.7390 (38.2% expansion).

— Written by David Song, Currency Strategist

Follow me on Twitter at @DavidJSong