AUD/USD Trades to Fresh Yearly High Ahead of RBA Policy Statement

Australian Dollar Talking Points

AUD/USD tags a fresh 2020 high (0.7241) following the Reserve Bank of Australia (RBA) meeting as the central bank sticks to the status quo, and current market conditions may keep the exchange rate afloat as the crowding behavior in the US Dollar persists.

AUD/USD Trades to Fresh Yearly High Ahead of RBA Policy Statement

AUD/USD initiates a series of higher highs and lows during the first week of August as the RBA retains the current policy, and it seems as though the central bank will carry out a wait-and-see approach throughout the remainder of the year as Governor Philip Lowe and Co. insist that “the Bank’s mid-March package of support for the Australian economy is working as expected.

It appears as though the RBA is in no rush to alter the course for monetary policy as the central bank pledges to “purchase AGS (Australian Government Securities) in the secondary market to ensure that the yield on 3-year bonds remains consistent with the target,” and the updated Statement on Monetary Policy may keep AUD/USD afloat as the central bank continues to rule out a negative interest rate policy (NIRP) for Australia.

In turn, the RBA may merely buy time at the next meeting on September 1 as Treasurer Josh Frydenberg extends fiscal stimulus programs like the Jobkeeper Payment for six-months, 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 33.05% of traders net-long the pair as the ratio of traders short to long stands at 2.03 to 1. The number of traders net-long is 21.16% lower than yesterday and 15.73% lower from last week, while the number of traders net-short is 10.15% higher than yesterday and 6.67% higher from last week.

The decline in net-long position could be indicative of profit-taking behavior as AUD/USD trades to a fresh 2020 high (0.7241), while the rise in net-short interest suggests the crowding behavior in the US Dollar will persist even though theDXY index plummets for sixth consecutive weeks.

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 carries into August, but the Relative Strength Index (RSI) appears to be deviating with price as the oscillator struggles to push into 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 struggles to push above 70 and threatens trendline support.
  • Nevertheless, the break/close above the 0.7180 (61.8% retracement) region brings the 2019 high (0.7295) as AUD/USD rebounds from the Fibonacci overlap around 0.7090 (78.6% retracement) to 0.7140 (23.6% retracement), with the next area of interest coming in around 0.7370 (38.2% expansion).

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— Written by David Song, Currency Strategist

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