AUD/USD Rebound Unravels Ahead of RBA as CPI Report Fails to Impress

Australian Dollar Talking Points

AUD/USD quickly pares the advance from the 2018-low (0.7021) as updates to Australia’s Consumer Price Index (CPI) does little to alter the monetary policy outlook, and the exchange rate remains vulnerable going into the next Reserve Bank of Australia (RBA) meeting on November 5 as the central bank looks poised to carry the record-low cash rate into 2019.

AUD/USD Rebound Unravels Ahead of RBA as CPI Report Fails to Impress

Image of daily change for audusd rate

The downtick in the headline reading for inflation should keep the RBA on the sidelines as ‘growth in household income remains low and debt levels are high,’ and Governor Philip Lowe & Co. may continue to tame bets for higher borrowing-costs as ‘the low level of interest rates is continuing to support the Australian economy.’

In turn, the RBA looks poised to carry its wait-and-see approach into 2019, with the diverging paths for monetary policy casting a bearish outlook for AUD/USD as the Federal Reserve sticks to its hiking-cycle, but the weakness in the exchange rate has been largely accompanied by a shift in retail interest as traders appear to be positioning for a near-term correction.

Image of IG client sentiment for audusd

The IG Client Sentiment Report still shows retail interest near extremes as 70.5% of traders are net-long AUD/USD, with the ratio of traders long to short at 2.39 to 1. In fact, traders have remained net-long since September 24 when AUD/USD traded near 0.7270 even though price has moved 2.4% lower since then. The number of traders net-long is 4.0% higher than yesterday and 1.7% higher from last week, while the number of traders net-short is 14.1% lower than yesterday and 16.2% lower from last week.

The ongoing skew in retail interest continues to offer a contrarian view to crowd sentiment, with the broader outlook for AUD/USD still tilted to the downside as both price and the Relative Strength Index (RSI) track the bearish formations from earlier this year. Sign up and join DailyFX Currency Analyst David Song LIVE for an opportunity to discuss potential trade setups.

AUD/USD Daily Chart

Image of audusd daily chart

  • The rebound from the 2018-low (0.7021) may unravel as AUD/USD struggles to get back above the 0.7090 (78.6% retracement) to 0.7110 (78.6% retracement) region, with the November opening range in focus going into the RBA meeting.
  • In turn, the 0.7020 (50% expansion) hurdle sits on the radar, with the next downside region of interest coming in around 0.6950 (61.8% expansion).

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— Written by David Song, Currency Analyst

Follow me on Twitter at @DavidJSong.

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