AUD/USD price analysis: is a trend reversal imminent?
14:37, 7 December 2021
AUD/USD has been one of the worst performing major currency pairs over the past month, falling about 4% as investors' appetite for riskier assets has been hampered by concerns about the novel Covid-19 Omicron variant.
However, the Australian dollar has outperformed other major currencies over the last two sessions as risk sentiment recovered, causing the AUD/USD exchange rate to bounce from the 0.70 region, its lowest level since the start of the year.
The last time the AUD/USD pair recovered from 0.70 was in early November 2020, reversing a bearish trend and posting an 8% gain over the next two months as a result of the discovery of Covid-19 vaccines.
The underlying fundamental picture for AUD/USD remains highly influenced by the Federal Reserve and Reserve Bank of Australia (RBA) monetary policy divergences, as well as pandemic-related news.
In technical terms, AUD/USD has formed a so-called “triple bottom pattern”, which might increase the chances of a trend reversal. The first area of resistance is at 0.7120-0.7130, and a break beyond it might become a potential new support for the pair. A more hawkish Fed next week, or increased concerns over the Omicron variant, might halt the AUD/USD trend reversal and bring bears back.
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Triple bottom on AUD/USD
AUD/USD fundamental analysis
In recent weeks, the discovery of the new Omicron variant of Covid-19, which looks to be more infectious than the others already in circulation, has reignited investor’s worries about an economic slowdown, pushing the price of risky assets lower.
Due to its high-beta profile, the Australian dollar (AUD), commonly known as the Aussie, underperformed as investors’ risk sentiment deteriorated, confirming its strong correlation with global equity markets. But in recent sessions, reassuring data on the new variant’s less severe symptoms have revived support for risky assets, resulting in a bounce in the AUD/USD exchange rate.
Confirmation of a milder form of the disease and a stronger capacity to manage it with the vaccinations currently in place could potentially bolster sentiment toward the Aussie ahead of next week’s Fed meeting.
In terms of monetary policy, there appears to be a difference in the approach between the Fed and the RBA at this juncture. The RBA left interest rates steady at a record low 0.1% in December, stressing that it is not in a hurry to raise them as long as inflation stays restrained. The Fed, on the other hand, is shifting towards a more hawkish position, as it considers speeding up tapering and boosting rates next year in reaction to growing price pressures in the United States.
This monetary policy divergence is mirrored in the short-term yield spread between Australia and the US, which narrowed significantly in the past month, contributing to the AUD/USD weakness. Since November, the two-year yield differential between Australia and the US has declined to -28 basis points (bps) from +9bps, owing to the RBA’s opposition to interest rate hikes, and AUD/USD has followed suit.
AUD/USD technical analysis
The Australian dollar has recovered to 0.71 versus the US dollar from a year-to-date low of 0.70, following 13 negative days in the preceding 16 sessions.
This is the third time since October 2020 that AUD/USD has rebounded from the 0.70 level. When the AUD/USD hit 0.70 in November 2020, it then gained around 8% in the next two months.
AUD/USD is now trading 3% below its 50-day simple moving average (SMA), 5.3% below the 200-day SMA and 11.4% below its 2021 highs.
On the daily chart, the 14-day relative strength index (RSI) has edged up to 36, after hovering in the oversold area since November 25.
The rebound following the triple bottom may raise the likelihood of a trend reversal for AUD/USD, if the global backdrop remains supportive for risky assets.
The first resistance is at 0.7130 (0.236 Fibonacci retracement level). A breakthrough of this level might may establish a potential new support for the pair, giving bulls hopes to look at 0.7770 (50% Fibonacci retracement) as the next resistance level.
Alternatively, the trend reversal for AUD/USD may prove to be short-lived if the Fed sounds more hawkish next week, or if investors’ fears around the Omicron variant intensify, leading bears back to target the 0.70 level.
Before investing in any asset, always do your own research or contact your financial adviser before arriving at a decision. Remember that your decision should be based on your attitude to risk, your expertise in this market, the spread of your portfolio and how comfortable you feel about losing money. Never invest more than you can afford to lose and keep in mind that past performance is no guarantee of future returns.