The U.S. Dollar Index is poised to head into a major overbought zone ahead of the Australian dollar, according to a new forecast from The Conference Board of Australia (TCB). The overbought zone is where currency investors expect the strength of the US Dollar to be limited against the currencies of other major economic partners. The US Dollar Index is supposed to head into a major overbought zone after the release of the US National Economic Statement on December 14th, which outlines a number of stimulus programs that are expected to be released in the coming year.
Australia’s currency market is likely to face similar oversold conditions if the U.S. economy heads into a recession. If you want to trade the AUD/USD, you should be aware that you will likely face further oversold conditions until the US Dollar begins to weaken against the Australian Dollar. The oversold condition of the Australian dollar is a major long-term trend. The over the counter currency trading (forex) market is characterized by the fact that there is a tendency for forex traders to try to enter long positions, as they believe that the prices of the major currencies will go up in the coming days. In addition to this, traders may find that they make more profits if they attempt to short positions in the forex market. Short positions allow for traders to reduce their risks in forex trading, but they also result in smaller gains during periods when the market is oversold.
Traders have been trying to determine whether the AUD/USD would head towards a possible overbought territory, as well as whether there would be a break out above the overbought zone. In recent weeks, there has been a strong push in the direction of the AUD/USD against the American dollar. The current scenario is one where a long position in the USD could be supported, but an oversold condition in the AUD/USD would suggest that short traders would be over-trading the Australian dollar and possibly even into a replacement scenario that will reverse course. The question is, how are things going to work out for the AUD/USD in the next few weeks and months?
First, we note that the AUD/USD is currently in an oversold condition. As we noted in our previous blog, the recent weakness in the US economy has pushed the euro higher against the dollar, which has driven the Australian dollar index (AUSH) lower. This over the counter currency trading scenario has been extended to the AUD/USD as well. This situation is being driven by overbuilders in Japan and China, combined with weakness in Europe and the United States (and possible US stimulus) and is being facilitated by low liquidity and low trading frequency in the major markets including Tokyo, Hong Kong, and Sydney.
Although this overbought zone remains, there are two significant events on the horizon that can change this. The first is the release of the revisions to the GDP at the end of the second quarter of the current year and the second is the release of the Jobs report for July. Both events are likely to cause a sharp depreciation in the AUSH, particularly against the USD.
The second event is less dramatic, but is more significant in its implications. One is the release of the transcript of the Federal Reserve Board of Directors meeting held in San Francisco on the same day as the Australian economy reported its quarterly growth and employment figures for the month of July. The transcript shows that the Federal Reserve Bank was briefed by the US Federal Reserve Chair Janet Yellin, Vice Chairman John Taylor, and the Managing Director of the Fed, Stanley Fischer. These three central bankers discussed Australia’s outlook for the economy, which was reported in the Australia jobs report dec 14th, 2020. In this meeting, the Reserve Bank of Australia (RBA) revealed that its gross domestic product (GDP) had strengthened by 3.2%, driven by an increase in gross domestic investment (GDI). This improvement in the performance of the economy came after two years of economic contractions and global financial crises.
In light of this, experts forecast that the overbought currency may continue to depreciate against the USD, possibly as high as AUD/USD crosses the $ACA level. If this occurs, a third party would likely come into play. A possible third party is the Reserve Bank of India, which could either take the bull in the marketplace and purchase USD back from a long position or move the market order of the Reserve so that it trades higher (on a short position) to take advantage of the overbought condition. In the event the overbought condition persists or even accelerates sharply, the Asian Central Bank (ACB), which is also a major player in the global economy, may decide to intervene in the markets, perhaps taking the side of the AUD/USD against the USD, driving up the values further.
The oversold condition is similar to what happened during the credit crunch in the United States, where over-leveraged finance companies were encour