AUD/USD Reaches Critical Pivotal Point

A rally from last week’s lows in AUD/USD has carried momentum behind it as the pair has erased losses for the entire month, retracing back to the Monthly open. In the current five-session recovery, the pair has wiped out the prior nine sessions of losses seen from October 3 highs.

AUD/USD opened the month of October at 0.7652 and reached a low of 0.7506 last week. In the current recovery, the pair reached a high of 0.7689 earlier today, prior to edging back. The exchange rate was last seen at 0.7662 for a gain of 0.45% on the day. The rally from last week’s low marks a gain of 156 points or 2.08%.

The current area in the pair is seen as a pivotal point for a medium-term directional bias. A declining trendline connecting April highs to August highs has already triggered a turn lower in September and October. A push higher from current levels would threaten the trendline, while a break above combined with a move back above positive territory for the month would provide a clear bullish signal.

Sentiment towards the Aussie has been bullish with the latest COT data reporting a build of $144 million to take the net long position among non-commercials to $1.97 billion. The Aussie was the only net long currency reported to increase in size apart from the US Dollar, among the majors. As well, the Aussie was one of two currencies that posted gains against the Greenback in the past week, despite the Dollar breaking higher.

The US Dollar index (DXY) broke to seven-month highs last week, scaling above the prior top posted in July. DXY has fallen into a consolidation since then, as a narrow range has developed above the July highs. With the index breaking higher, it appears unlikely that AUD/USD would make a sustained break higher, to signal a bullish trend over the medium-term.

The Reserve Bank of Australia released minutes from their latest monetary policy meeting. They stated that inflation remains low globally and that earlier easing efforts remain very stimulatory. Similar remarks had been made at the prior two meetings. The central bank added that the next meeting would provide the latest CPI figures and will be used in considering the economic outlook. While markets tend to view low levels of inflation as a trigger for further easing, the RBA may consider a poor reading in the next CPI release on October 25 as a signal that their easing efforts have not provided the stimulatory effect that they desired.

There were some concerns surrounding the labor and housing markets. There has been a pickup in labor figures, but the data has largely been reflecting part-time employment thus not having the desired effect. Housing remains a concern despite the previously released monetary policy statement not giving any indication of uncertainties. There was a further growth in house price inflation and auction clearance rates in Sydney and Melbourne. If it is determined that the housing market is at risk, the central bank’s hands would be tied in their ability to ease further. There is a supply of housing scheduled to come into the markets over the next couple of years, the central bank will want to ensure there isn’t a spike in house prices ahead of the increase in supply.

Out of the United States today, the latest inflation figures were released. The consumer price index for the September was reported to rise 1.1% and for the year 1.5%, both figures in line with expectations. The core figures came in softer than expected with a rise of 0.1% in September and 2.2% for the year.

The rally in AUD/USD was capped today at resistance seen at 0.7689. The level references a spike high from late September and an attempt at the level in early October served to set a high for the month. The declining trendline from April highs remains overhead and has not been tested as of yet, but with the prior September high in close vicinity and the pair trading near its monthly opening price, bears may look to step in. To the downside, the first level of support is seen at 0.7647. The level reflects a high posted during the UK vote and had triggered a correction lower on Friday. A break below the level would build to the conviction that a turn lower is taking place within the recent downtrend from August highs.

AUD/USD Daily Chart

AUDUSD Daily Oct 17

Jignesh is an analyst and trader, specializing in currencies and commodities. He utilizes a macro view as well as a proprietary method of pattern recognition that is based on the principles of Elliott wave. His focus is to assess strength in trends, and perceiving high potential turning points in the markets. He brings over 4 years of experience in his current role.