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AUD/USD rate selloff pushes RSI back into oversold territory

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AUD/USD takes out the July 2020 low as the ongoing deterioration in risk appetite continues to drag on commodity bloc currencies. The move below 30 in the RSI is likely to be accompanied by a further decline in the exchange rate.

Source: Bloomberg

AUD/USD rate selloff pushes RSI back into oversold territory

AUD/USD trades to a fresh yearly low (0.6834) with the US stock market on track to enter a bear market, and current market themes may push the exchange rate towards the June 2020 low (0.6648) as major central banks alter the course for monetary policy in an effort to tame inflation.

Looking ahead, it seems as though the Federal Reserve will continue to move ahead of its Australian counterpart as Chairman Jerome Powell reveals that 'there is a broad sense on the Committee that additional 50 basis point increases should be on the table at the next couple of meeting,' and expectations for a further shift in Fed policy may keep the US dollar afloat as the Federal Open Market Committee (FOMC) plans to wind down its balance sheet starting in June.

Meanwhile, the Reserve Bank of Australia (RBA) appears to be on a more gradual path in normalizing monetary policy as the 'Board does not plan to reinvest the proceeds of maturing government bonds' and it seems as though Governor Philip Lowe and Co. will allow its holding to naturally roll off its balance sheet as the central bank 'is not currently planning to sell the government bonds that the Bank purchased during the pandemic.'

In turn, expectations for another 50bp Fed rate hike may keep AUD/USD under pressure ahead of the next RBA rate decision on June 7 amid the deterioration in risk appetite, and a further decline in the exchange rate may fuel the tilt in retail sentiment like the behavior seen during the previous year.

1652404980999.pngSource: TradingView

The IG Client Sentiment report shows 74.02% of traders are currently net-long AUD/USD, with the ratio of traders long to short standing at 2.85 to 1.

The number of traders net-long is 8.09% higher than yesterday and 22.30% higher from last week, while the number of traders net-short is 7.50% higher than yesterday and 19.50% lower from last week. The crowding behavior has eased from earlier this week despite the rise in net-long interest as 75.68% of traders were net-long AUD/USD earlier this week, while the decline in net-short position comes as the exchange rate trades to a fresh yearly low (0.6834).

With that said, AUD/USD may attempt to test the June 2020 low (0.6648) amid the weakness across commodity bloc currencies, and a move below 30 in the RSI is likely to be accompanied by a further decline in the exchange rate like the price action seen earlier this month.

1652405023776.pngSource: TradingView

David Song | Analyst, DailyFX, New York City
13 May 2022
This information has been prepared by DailyFX, the partner site of IG offering leading forex news and analysis. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients.

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