Australian Dollar Technical Analysis: Bullish Breakouts Ahead of RBA

Australian Dollar Outlook:

• AUD/JPY rates are climbing through symmetrical triangle resistance, but still remain below the ascending trendline from the March 2020 and August 2021 lows.
• Similarly, AUD/USD rates are attempting to breakout above bullish falling wedge resistance.
• According to the IG Client Sentiment Index, both AUD/JPY and AUD/USD rates have mixed biases in the near-term.

AUD Weathers Volatility in Risk Assets

Volatility continues to wreak havoc across asset classes as global financial markets digest the European Union’s and United States’ aggressive sanctions against Russia for the invasion of Ukraine. But with a busy economic calendar in the days ahead, FX markets are also calibrating their focus on discriminate event risk; the Australian Dollar is readying for the March Reserve Bank of Australia rate decision.

The Reserve Bank of Australia is increasingly likely to raise interest rates in the first half of the year after several months of better than expected economic data. The current Australian unemployment rate is 4.2%, already-matching the RBA’s 2022 year-end forecast. But there is a potential hurdle that is delaying action by the RBA sooner: Australian federal elections have to be held by May at the latest. Once the elections pass, the RBA will be freer to act. Hawkish commentary by the RBA – instead of a rate hike – is likely to keep the Australian Dollar supported.

AUD/USD RATE TECHNICAL ANALYSIS: DAILY CHART (February 2021 to February 2022) (CHART 1)

As has been the case for several months, AUD/USD rates have traded within the confines of three multi-month technical patterns: the descending parallel channel in place since the end of June 2021; the breakdown below the rising trendline from the March 2020 and August 2021 lows; and a potential bullish falling wedge since the end of October 2021. Despite the volatility across financial markets, AUD/JPY rates have started to breakout above the descending trendline from the October 2021 and January 2022 swing highs.

The pair is above their daily 5-, 8-, 13-, and 21-EMA envelope, which is in bullish sequential order. Daily Slow Stochastics have started trending higher while above their signal line, but have yet to reach overbought territory. Meanwhile, daily MACD is trending higher, continuing its push above its signal line. Follow through higher targets the evening star candlestick pattern high set at the start of January at 0.7314, followed by the descending parallel channel resistance near 0.7400.

IG Client Sentiment Index: AUD/USD RATE Forecast (February 28, 2022) (Chart 2)

AUD/USD: Retail trader data shows 46.59% of traders are net-long with the ratio of traders short to long at 1.15 to 1. The number of traders net-long is 10.31% higher than yesterday and 12.86% lower from last week, while the number of traders net-short is 1.74% higher than yesterday and 12.58% lower from last week.

We typically take a contrarian view to crowd sentiment, and the fact traders are net-short suggests AUD/USD prices may continue to rise.

Positioning is less net-short than yesterday but more net-short from last week. The combination of current sentiment and recent changes gives us a further mixed AUD/USD trading bias.

AUD/JPY RATE TECHNICAL ANALYSIS: DAILY CHART (February 2021 to February 2022) (CHART 3)

Even though AUD/JPY rates remain in the middle of their year-long range, the pair has started to push above symmetrical triangle resistance from the October 2021 and January 2022 swing high. Bullish momentum is improving, with the pair above its daily 5-, 8-, 13-, and 21-EMA envelope, which is in bullish sequential order. Daily MACD is trending higher while above its signal line, and daily Slow Stochastics are moving up towards overbought territory. Bullish momentum may carry the pair to the yearly high just below 84.00, before continuing towards the ascending trendline from the March 2020 and August 2021 lows closer to 85.00.

IG Client Sentiment Index: AUD/JPY Rate Forecast (February 28, 2022) (Chart 4)

AUD/JPY: Retail trader data shows 27.58% of traders are net-long with the ratio of traders short to long at 2.63 to 1. The number of traders net-long is 22.22% higher than yesterday and 39.63% lower from last week, while the number of traders net-short is 1.14% lower than yesterday and 8.13% 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.

Positioning is less net-short than yesterday but more net-short from last week. The combination of current sentiment and recent changes gives us a further mixed AUD/JPY trading bias.

— Written by Christopher Vecchio, CFA, Senior Strategist