RSI Flops Ahead of Overbought Territory


Australian Dollar Talking Points

AUD/USD snaps six consecutive days of advances following the limited reaction to the Reserve Bank of Australia (RBA) interest rate decision, and the exchange rate may consolidate over the coming days as the Relative Strength Index (RSI) appears to be reversing course ahead of overbought territory.

Australian Dollar Forecast: RSI Flops Ahead of Overbought Territory

AUD/USD seems to have marked a failed attempt to test the 2020 high (0.7064) even though the RBA keeps the official cash rate (OCR) at the record low of 0.25% in July, and the bullish momentum may continue to abate as the RSI pulls back ahead of 70.

The RSI may reflect a potential shift in AUD/USD behavior as the oscillator fails to preserve the positive slope from earlier this month, and the Australian Dollar may face headwinds over the near-term as Victoria reinstates stage 3 lockdown in response to the renewed COVID-19 cases.

Looking ahead, the RBA may come under pressure to further support the Australian economy as programs like the Jobkeeper Paymentis set to expire on September 27, and the central bank may find it difficult to justify a wait-and-see approach for monetary policy as the government shows little interest in extending the fiscal stimulus.

Image of RBA interest rate decisions

Source: RBA

In turn, RBA board member Ian Harper insists that fiscal authorities should set up a “tapering arrangement” amid the uncertainty surrounding the economic outlook, but current conditions may force the central bank to act especially as Standard and Poor’s and Fitch Ratings cut Australia’s credit rating outlook to ‘negative’ from ‘stable.

It remains to be seen if the RBA will revert back to a dovish forward guidance as Governor Philip Lowe and Co. reveal that “the Bank has not purchased government bonds for some time,” and the central bank may stick to the same script at the next meeting on August 4 as the officials pledge to “not increase the cash rate target until progress is being made towards full employment.”

Until then, the resilience in the Australian Dollar may poised to persist as the RBA scales back its bond purchases, but lack of momentum to test the 2020 high (0.7064) may generate a near-term correction in the exchange rate as the RSI appears to be reversing course ahead of overbought territory.

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AUD/USD Rate Daily Chart

Image of AUD/USD rate daily chart

Source: Trading View

  • Keep in mind, the monthly opening range was a key dynamic for AUD/USD in the fourth quarter of 2019 as the exchange rate carved a major low on October 2, with the high for November occurring during the first full week of the month, while the low for December materialized on the first day of the month.
  • The opening range for 2020 showed a similar scenario as AUD/USD marked the high of the month on January 2, with the exchange rate carving the February high during the first week of the month.
  • However, the opening range for March was less relevant, with the high of the month occurring on the 9th, the same day as the flash crash.
  • Nevertheless, 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 February high (0.6774) as the Relative Strength Index (RSI) pushed into overbought territory.
  • AUD/USD appears to be stuck in a narrow range after trading to a fresh 2020 high (0.7064) in June, and the exchange rate may continue to consolidate in July as the RSI fails to retain the bullish trend from earlier this year and appears to be reversing course ahead of overbought territory.
  • The string of failed attempts to close above the 0.6970 (23.6% expansion) to 0.6980 (23.6% expansion) region keeps the Fibonacci overlap around 0.6720 (78.6% expansion) to 0.6800 (61.8% expansion) on the radar as AUD/USD trades within the June range.
  • Need a break/close above the 0.6970 (23.6% expansion) to 0.6980 (23.6% expansion) region to open up the 2020 high (0.7064), with the next area of interest coming in around 0.7090 (78.6% retracement), which largely lines up with the July 2019 high (0.7082).
  • At the same time, a break/close below Fibonacci overlap around 0.6720 (78.6% expansion) to 0.6800 (61.8% expansion) opens up the downside targets, with the first area of interest coming in around 0.6600 (50% expansion) to 0.6650 (61.8% expansion), which largely lines up with the June low (0.66480).
  • Next area of interest comes in around 0.6520 (38.2% expansion) 0.6540 (78.6% expansion) followed by the overlap around 0.6380 (50% expansion) to 0.6450 (38.2% expansion).

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— Written by David Song, Currency Strategist

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