AUSTRALIAN DOLLAR TALKING POINTS

AUD/USD attempts to pare the sharp decline following the Federal Reserve interest rate decision, with the exchange rate bouncing back from a fresh monthly-low (0.7086), but the weakness may persist over the near-term as the Relative Strength Index (RSI) continues to track the bearish formation from earlier this month.

AUD/USD RATE OUTLOOK MIRED BY BEARISH RSI FORMATION

The limited reaction to the 37.0K expansion in Australia Employment leaves AUD/USD vulnerable to near-term headwinds as the report reveals a 6.4K contraction in full-employment, with the expansion in the headline reading driven by a 43.4K rise in part-time positions.

In response, the Reserve Bank of Australia (RBA)may continue to endorse a wait-and-see approach at the next meeting on February 5, and Governor Philip Lowe & Co. may keep the official cash rate (OCR) at the record-low throughout the first-half of 2019 as the lingering threat of a U.S.-China trade war clouds the economic outlook for the Asia/Pacific region.

The diverging paths for monetary policy casts a long-term bearish outlook for AUD/USD especially as the Federal Reserve show no signs of abandoning its hiking-cycle, with the aussie-dollar exchange rate still at risk of giving back the advance from the 2018-low (0.7021) as both price and the Strength Index (RSI) snap the bullish formations carried over from October.

Nevertheless, the IG Client Sentiment Report shows 72.7%of traders are now net-long AUD/USD compared to 65.6% yesterday, with the ratio of traders long to short at 2.66 to 1.In fact, traders have been net-long since December 4 when AUD/USD traded near 0.7350 even though price has moved 3.4% lower since then.The number of traders net-long is 2.3% higher than yesterday and 0.3% higher from last week, while the number of traders net-short is 28.9% lower than yesterday and 34.1% lower from last week.

Profit-taking behavior likely accounts for the drop in net-short interest, but the ongoing tilt in retail interest offers a contrarian view to crowd sentiment especially as the RBA appears to be bracing for a weaker exchange rate. 

AUD/USD DAILY CHART

• Keep in mind, the opening range for December keeps the downside targets on the radar for AUD/USD as it slips to fresh monthly lows, but now waiting for a close below the 0.7090 (78.6% retracement) to 0.7110 (78.6% retracement) region to open up the next downside hurdle around 0.7020 (50% expansion) area comes up next, which lines up with the 2018-low (0.7021).
• Will keep a close eye on the Relative Strength Index (RSI) as the oscillator extends the bearish formation from earlier this month, with the next downside hurdle coming in around 0.6950 (61.8% expansion).