Australian Dollar Outlook:
- AUD/JPY rates are continuing their bullish breakout, while AUD/USD rates are rangebound.
- The Reserve Bank of Australia’s June meeting minutes point to aggressive rate hikes in the near-future.
- According to the IG Client Sentiment Index, both AUD/JPY and AUD/USD rates have bearish biases.
Mixed Signals for the Aussie
The Australian Dollar has seen quite a bit of volatility recently, thanks to conflicting fundamental forces tugging and pulling on price action.
On the upside, continued elevation in energy prices – coal and oil – is providing a tailwind. As are RBA rate hike expectations, which took another turn higher over the past 24-hours after the RBA’s June meeting minutes suggesting an aggressive rate hike cycle lies ahead.
The downside has been prevalent as well. Base metal prices – copper and iron ore – have sagged in recent weeks. Global risk appetite continues to struggle as central banks – the RBA included – suggest that the only way to curtail multi-decade highs in inflation is through demand destruction, or weaker economic growth.
For AUD/JPY rates, the upside has been in focus, thanks in part to the struggles to the Japanese Yen. But for AUD/USD rates, which have carved out a 6.65% range since the beginning of May, it’s difficult to believe that the yearly lows have been established thus far.
AUD/USD RATE TECHNICAL ANALYSIS: DAILY CHART (February 2021 to June 2022) (CHART 1)
AUD/USD rates remain in the broad downtrend since the February 2021 high, with channel support established against the August 2021 and May 2022 lows. The 6.65% range carved out since early-May appears to have taken the form of a bear flag, when viewed in context of the preceding downtrend. That said, it is still a range, which means that a turn higher towards 0.7300 is possible before another move to the downside. Range trading remains the preference until either support around 0.6829/50 breaks to the downside or resistance around 0.7266/83 is breached to the upside.
IG Client Sentiment Index: AUD/USD RATE Forecast (June 21, 2022) (Chart 2)
AUD/USD: Retail trader data shows 70.15% of traders are net-long with the ratio of traders long to short at 2.35 to 1. The number of traders net-long is 7.55% higher than yesterday and 7.89% higher from last week, while the number of traders net-short is 4.75% lower than yesterday and 11.15% lower from last week.
We typically take a contrarian view to crowd sentiment, and the fact traders are net-long suggests AUD/USD prices may continue to fall.
Traders are further net-long than yesterday and last week, and the combination of current sentiment and recent changes gives us a stronger AUD/USD-bearish contrarian trading bias.
AUD/JPY RATE TECHNICAL ANALYSIS: DAILY CHART (December 2020 to June 2022) (CHART 3)
Unlike their AUD/USD counterpart, AUD/JPY rates retain an outright bullish technical bias, having just established their 2022 high earlier this month. The pair is now trading above the 76.4% Fibonacci retracement of the 2013 high/2020 low range at 94.68 as well as the 61.8% Fibonacci extension of the March 2020 low/May 2021 high/August 2021 range at 92.92.
AUD/JPY rates retain a bullish technical posture that warrants a ‘buy the dip’ mentality for the foreseeable future. The pair remains above its daily 5-, 8-, 13-, and 21-EMA envelope, which is in bullish sequential order. Daily MACD is above its signal line and is on the verge of issuing a fresh bullish crossover, while daily Slow Stochastics have turned higher after reaching their median line. The conclusion drawn is that more upside is ahead: first, to the June high at 96.88, then the 76.4% Fibonacci extension of the March 2020 low/May 2021 high/August 2021 range at 97.71.
IG Client Sentiment Index: AUD/JPY Rate Forecast (June 21, 2022) (Chart 4)
AUD/JPY: Retail trader data shows 42.46% of traders are net-long with the ratio of traders short to long at 1.36 to 1. The number of traders net-long is 35.86% higher than yesterday and 129.07% higher from last week, while the number of traders net-short is 7.29% lower than yesterday and 29.37% lower from last week.
We typically take a contrarian view to crowd sentiment, and the fact traders are net-short suggests AUD/JPY prices may continue to rise.
Yet traders are less net-short than yesterday and compared with last week. Recent changes in sentiment warn that the current AUD/JPY price trend may soon reverse lower despite the fact traders remain net-short.
— Written by Christopher Vecchio, CFA, Senior Strategist