Australian Dollar Technical Analysis: Bullish Momentum Accelerates – Setups in AUD/JPY, AUD/USD

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Australian Dollar Outlook:

  • AUD/JPY and AUD/USD rates have continued their push higher as markets shake off COVID-19 omicron variant concerns.
  • Both major AUD-crosses clocked in their highest closes of the month with just two trading days left in the year.
  • However, per the IG Client Sentiment Index, AUD/USD has a bullish bias while AUD/JPY has a neutral bias in the near-term.

Trading Higher with Risk

Markets are continuing to fade concerns around the COVID-19 omicron variant as data from around the globe has confirmed the higher transmissibility/lower lethality trade-off, assuaging concerns that there will be a significant hit the growth prospects. The rally by global equities and weakness in safe havens have proved to be a catalyst for high beta currencies like the Australian Dollar, which just posted fresh monthly highs today against several of its major currency counterparts. Bullish momentum is accelerating for the AUD-crosses into the end of the year, setting up what could be a strong start to 2022.

AUD/USD RATE TECHNICAL ANALYSIS: DAILY CHART (February 2020 to December 2021) (CHART 1)

AUD/USD rates remain in the broader confines of two multi-month technical patterns, the descending parallel channel in place since the end of June as well as the breakdown below the rising trendline from the March 2020 and August 2021 lows. Nevertheless, recent price action has seen the technical outlook to continue to improve after breaking above the downtrend from the October and November swing highs; a fresh monthly high was established today.

Momentum indicators have become outright bullish in the near-term. AUD/USD rates are above their daily 5-, 8-, 13-, and 21-EMA envelope, which is in bullish sequential order. In the past few days, daily MACD has started to climb through its signal line, while daily Slow Stochastics are holding in overbought territory. In the near-term, a continued trek higher towards the mid-November swing high at 0.7371 appears on track.

IG Client Sentiment Index: AUD/USD RATE Forecast (December 29, 2021) (Chart 2)

AUD/USD: Retail trader data shows 55.74% of traders are net-long with the ratio of traders long to short at 1.26 to 1. The number of traders net-long is 4.76% lower than yesterday and 7.46% lower from last week, while the number of traders net-short is 0.11% higher than yesterday and 5.35% higher from last week.

We typically take a contrarian view to crowd sentiment, and the fact traders are net-long suggests AUD/USD prices may continue to fall.

Yet traders are less net-long than yesterday and compared with last week. Recent changes in sentiment warn that the current AUD/USD price trend may soon reverse higher despite the fact traders remain net-long.

AUD/JPY RATE TECHNICAL ANALYSIS: DAILY CHART (March 2020 to December 2021) (CHART 3)

AUD/JPY rates are progressing higher into the top half of their year-long range, finding continuation after breaking above the descending trendline from the November and early-December swing highs as well as returning back above the ascending trendline from the March 2020 and August 2021 lows. As previously noted, “clearing the December high at 82.44 would mark a meaningful bullish technical reversal, opening the door for a return back to 86.00 in early-2022.” With a fresh December high established at 83.50, AUD/JPY rates remain on track for a move towards 86.00 over the coming weeks.

IG Client Sentiment Index: AUD/JPY Rate Forecast (December 29, 2021) (Chart 4)

AUD/JPY: Retail trader data shows 42.54% of traders are net-long with the ratio of traders short to long at 1.35 to 1. The number of traders net-long is 7.41% higher than yesterday and 5.43% lower from last week, while the number of traders net-short is 6.75% lower than yesterday and 5.38% higher from last week.

We typically take a contrarian view to crowd sentiment, and the fact traders are net-short suggests AUD/JPY prices may continue to rise.

Positioning is less net-short than yesterday but more net-short from last week. The combination of current sentiment and recent changes gives us a further mixed AUD/JPY trading bias.

— Written by Christopher Vecchio, CFA, Senior Strategist