Australian Dollar Forecast: Rebound Faces First Real Test

Australian Dollar Outlook:

• AUD/JPY rates are in the midst of a bullish falling wedge breakout, while AUD/USD rates have returned into a consolidation.
• Rates markets are pricing in an increasingly hawkish Reserve Bank of Australia over the coming months.
• According to the IG Client Sentiment Index, both AUD/JPY and AUD/USD rates have mixed biases.

Stability in Commodities Helping

The Australian Dollar is in the midst of a modestly impressive run over the past week, due to three key factors. First, safe havens have proved weaker as global equity markets have rallied. Second, commodity prices – base metals and energy in particular – have stabilized after a brutal sell-off beginning in May. Third, rates markets are pricing in a more aggressive Reserve Bank of Australia over the coming months following continued strength in Australia’s labor market.

The swath of positive developments on the fundamental front has been buffeted by favorable seasonality tendencies as well. In unison, these factors have help spur meaningful technical turnarounds in the major AUD-crosses, which may be facing their first true technical test amid the rebounds.

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

AUD/USD rates briefly fell out of the broad downtrend in place since the February 2021 high, but the rebound has not only seen a return into the downtrend, but a move back into the bear flag that began to form in early-May. These developments suggest that the bearish breakout failed, and traders should be looking for further advances henceforth. Momentum is starting to turn the corner, with AUD/USD rates above their daily EMA envelope, which is in neither bearish nor bullish sequential order. Daily MACD continues to climb albeit below its signal line, while daily Slow Stochastics are racing towards overbought territory. So long as the move in the flag is maintained – AUD/USD rates don’t reverse below 0.6850 – then near-term upside targets exist north of 0.7000.

IG Client Sentiment Index: AUD/USD RATE Forecast (July 20, 2022) (Chart 2)

AUD/USD: Retail trader data shows 60.80% of traders are net-long with the ratio of traders long to short at 1.55 to 1. The number of traders net-long is 0.60% higher than yesterday and 15.64% lower from last week, while the number of traders net-short is 7.85% lower than yesterday and 27.72% higher 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.

Positioning is more net-long than yesterday but less net-long 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 (December 2020 to July 2022) (CHART 3)

AUD/JPY rates still have a more bullish technical bias than their other major counterpart. The pair continues to trade 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. The return back above this cluster of Fibonacci levels coincides with a bullish falling wedge breakout, increasing confidence in the likelihood of an extended move to the topside.

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 trending higher, while daily Slow Stochastics have returned into overbought territory. Upside targets include 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 (July 20, 2022) (Chart 4)

AUD/JPY: Retail trader data shows 34.74% of traders are net-long with the ratio of traders short to long at 1.88 to 1. The number of traders net-long is 10.33% lower than yesterday and 9.27% higher from last week, while the number of traders net-short is 0.65% higher than yesterday and 6.90% higher 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 more net-short than yesterday but less 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